A question that sometimes comes up during retirement planning is whether it makes sense to take a pension as a lump sum or an annuity payment. Many of my clients are employees of DTE Energy, and some current DTE employees originally joined the company under MichCon (also known as MCN). As I have discussed in previous articles, the timing of retirement can affect various aspects of your post-retirement lifestyle, so it is important to have a clear understanding of how your different income streams will fit into the big picture.
Early Retirement Annuity Subsidy
Like some other employers, DTE offers an incentive to retire early. DTE employees may not realize it but their pension is reduced if they retire prior to age 65. The incentive is that the reduction is offset by a subsidy. Employees, however, do not receive a subsidy if they take the lump sum. This is why we see the lump sum option become more attractive beginning at age 65.
Options For Prior MCN Employees
Employees who originally worked for MCN have some additional options (see also my article on the MCN Severance Package). Some prior MCN employees can take a partial lump sum AND a partial monthly annuity on their pensions. This can offer some additional benefits for tax, legacy, and estate planning. In addition, the partial lump-sum option can make it easier to “right-size” your post-retirement monthly income to match your expected expenses.
A Position Of Strength
I have recommended to some of my clients that if they take the lump-sum pension distribution option, it makes the most sense to do so from a position of strength. Specifically, it is best to take a lump sum when you do not need to match the monthly annuity income from the lump sum. You may be in a position of strength if you have other income sources or investments that you expect will suffice to cover your monthly expenses. Perhaps you plan to continue working in retirement or anticipate low monthly expenses. In cases such as these, you could consider taking advantage of certain strategies that involve the lump-sum option.
How I Can Help
Just like any other aspect of financial planning, there is no universal answer to the question of whether a lump sum or an annuity payment makes more sense. We have to consider your full financial situation and look at your long-term goals. If you are close to retirement, I’d love to get to know more about you. You can give me a call at (248) 220-4321, email firstname.lastname@example.org, or schedule a meeting by visiting www.calendly.com/cwmrob/initial.
Robert Moore is senior partner, financial planner, investment advisor, and co-owner of Center for Wealth Management, an independent, fee-based wealth management company based in Troy, MI. With more than 15 years of experience, Rob provides customized advice and solutions that are in the clients’ best interest. He strives to always go above and beyond his clients’ expectations, helping them retire with more security than they had before, and invest their time and energy in what’s most important to them. Rob specializes in working with DTE Energy employees, helping them maximize their benefits so they can reduce taxes, prepare for retirement, and protect their families through a comprehensive planning process. Rob graduated from Michigan State University and holds the CERTIFIED FINANCIAL PLANNER® (CFP®) and Chartered Financial Consultant® (ChFC®) designations.
Rob is known as a diehard family man who enjoys spending time with his beautiful wife, Jill, his daughter, Brookelyn, and his son, Brayden. When he’s not working, you can find him playing basketball once a week, squeezing in a round of golf, and watching college football and basketball with friends and family. He is passionate about enriching the lives of others through his church involvement and service at a community addiction program. Learn more about Rob by connecting with him on LinkedIn.