Lump Sum Payouts for Dummies

Next to plumbing and electrical wiring, one of the biggest so-called black boxes on the planet appears to be retirement planning. In Grandpa's day, it was pretty simple: you worked at some factory for 45 years and, on your 65th birthday, they gave you a gold watch and started paying you a pension. No more... people jump from job to job at a frantic pace and almost no one has a pension any more. If, however, you are eligible for a pension, you'd be wise to look for more competent financial advice than that of Aaron Marquis in his PocketSense.com post, "Lump Sum Payout Vs. Monthly Pension Benefits."¹

We submit that when making major financial decisions it might be better to seek advice from a financial planner than a film school grad who writes comedy on the side. Note to Marquis: retirement income ain't funny...

Be that as it may, it looks as though Aaron who, being decades from retirement when he wrote this for eHow.com, wasn't all that aware of the topic. For instance, he tries to tell retiring seniors that, "With a lump sum payout, you can invest the money immediately into a Roth IRA, a savings account, a CD or a mutual fund. Because the lump sum is a large cash amount, it gains larger returns than that of a monthly pension." Wait, what? the lump sum "gains larger returns" than a pension? In the first place, a pension doesn't "gain... returns"; it's a defined sum. With a lump sum, you have to invest the money yourself or turn it over to a financial advisor. When deciding whether to take the lump-sum payout or a fixed monthly pension, retirees must consider whether they feel qualified to invest that payout and generate an income equal to or greater than the promised monthly stipend. Aaron's comments on this decision?

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Perhaps the worst "advice" however, that Marquis manages to dump into his post is this falsehood:

"When you receive a lump sum payout from your company, you typically pay taxes on the amount once. Even if you roll the lump sum into a Roth or traditional IRA, you do not pay taxes until you withdraw the full amount."

No, Aaron, if you roll the lump sum payout into a traditional IRA, you do not pay taxes until you withdraw the funds; and then only on the amount you withdraw. The tax difference between a $500,000 taxable lump sum in one year and 20 years of $25,000 annual payouts is... let's just say, "significant." Marquis also botched the definition of a Roth IRA: with a Roth, you pay the taxes up front but after that, funds withdrawn from the IRA are tax-free.
Such is the peril of taking advice about funding your retirement from someone whose entire body of knowledge can be summed up in a USA Today article (one that doesn't even mention taxes).  Try to avoid getting your advice from people like our Dumbass of the Day, OK?

¹ The original has been deleted by Leaf Group, but can still be accessed using the Wayback machine at archive.org. Its URL was   ehow.com/info_10004815_lump-sum-payout-vs-monthly-pension-benefits.html

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