By John Spoto

In my last article, I talked about the decision facing older workers fortunate enough to have an old-fashion pension waiting for them when they retire…how to take their pension benefit. Should it be a lifetime stream of checks (annuity) for as long as they (and if they choose, their spouse) live, or would a single lump sum payment a better choice?

This irrevocable decision will make a big difference in a retiree’s quality of life, so it’s important to get it right. A 2007 Vanguard study found that 75 percent of pensioners opted for the lump sum, raising the concern that some workers are making a hasty and ill-informed decision.

Every situation is unique. The option your coworker or friend chose may not be the best one for you. To help get it right, do a thorough side by side comparison of the two options and ask yourself some critical questions. Do you expect to live a long life? Are you concerned that you don’t have the commitment to control your spending or skills to manage your investments? Are you confident that your employer’s retirement plan is financially sound, and the monthly checks will continue for life? A yes answer to these favors the monthly annuity over the one-time pension payout.

There is assistance available to help you make the decision. Be aware, however, there are potential conflicts of interest that certain parties have. Here is one of the big ones.

Employers want to reduce their risk. Generating a constant, fixed-dollar amount from a volatile portfolio of stocks and bonds is complicated and fraught with two main types of risk, investment risk and longevity risk.

Investment risk. Drawing a fixed dollar amount when investment values decline can deplete a portfolio prematurely. With an annuity, the employer shoulders that risk. Every month for the lifetime of the retiree (and perhaps spouse), the employer is responsible to payout the promised benefit regardless of economic conditions, investment performance or the how long the retiree or spouse lives. If financial markets plummet and stay that way for a prolonged period, the pension checks still have to go out.

Next time, we’ll take a look at longevity risk and also examine another area where conflicts of interest could have negative effects on your financial future.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.

John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com