Retirement Lump Sum Payment Calculations
Pension plans are funded based on the requirements set forth by the Pension Protection Act of 2006. This particular act defined the manner in which a lump sum distribution is calculated, including the minimum permissible value of any lump-sum payments. The rules took effect in 2008 and made the amount received for a lump-sum payment much less attractive than regular monthly payouts, according to Kiplinger.
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Factors
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The amount of your lump-sum distribution depends upon a number of different factors. One factor is the average pay you made throughout your career. This is coupled with the additional factor of how many years of service you provided in your career. In addition to these, the prevailing interest rate at the time you take your distribution and your life expectancy also factor into the equation.
Calculation
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Prior to 2008, the lump sum calculation was determined based on the prevailing U.S. Treasury rate. This resulted in lump-sum calculations that tended to encourage the one-time payment, rather than lifetime payments. This occurred largely because the Treasury rates were generally lower than other rates. After 2008, the Treasury-bond rate took a backseat to a blended corporate bond rate. The end result is lump-sum payments lower than were previously received under the pre-2008 requirement. Calculation is made based on an annuity factor that is determined at the time of your retirement.
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Investments
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The investments you pursue as part of your portfolio will also affect the amount that you receive as your lump-sum payment. Ultimately, the calculation depends upon the actual amount that you have accumulated by the time that you decide to retire, but if you're trying to decide whether or not to take a lump-sum payment a few years down the road while you continue to work, the calculation becomes more complicated. This is due to the fact that the investments in your portfolio may differ in their rate of return from year to year and this is impossible to predict.
Decision
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The decision of whether or not to take the lump-sum payment can be a difficult one to make. You can make this determination based on difference between what you would receive as a lump sum and what you would receive over a lifetime of payments, but there is a drawback to this approach. It assumes a static view of money, comparing money taking now to money over time. It does not necessarily account for inflation or other factors that either increase or decrease the value of your money. You can choose to roll over your lump-sum payment into another retirement vehicle, such as an IRA, and continue to earn substantial interest on it over the long haul.
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