• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
main-logo

Zynergy

Retirement Planning

  • 732-784-2380
  • Member Login
  • Home
  • About Us
  • Our Services
  • Retirement Education
  • Retirement Enrichment Program
  • Zynergy Cares
  • Contact Us

Collecting the Lump-Sum or the Annuity Payments: Which is Better?

fee-only financial planner

October 6, 2020 by Ryan Zacharczyk

Retirement should be filled with freedom, leisure, travel, and time with our loved ones. However, it can also be filled with angst if we don’t properly plan for potentially 30+ years of expenses without the income from a job. Most people only retire once, which means you have no experience doing it and once your choices are made, there are no do-overs, so getting it right the first time is essential.

As retirement planners, one of the top questions we receive from our members and prospects is regarding the option that is offered by their pension plan at retirement. “Should I take the lump-sum or collect the monthly annuity payments that are guaranteed?” A decision that is so important and so final can only lead to anxiety, however, by arming yourself with information, you can make the decision that is best for you. Here are the benefits of each pension planning option:

Annuity

  1. Sleep – The annuity option is traditionally the best option for your peace of mind.  There is something very comforting about knowing you will get a monthly paycheck regularly for the rest of your life.
  2. Longevity – People today live longer.  Medical advancements and healthier lifestyles have led to projections of most baby boomers living longer than they expect.  The annuity option is a fantastic decision if you outlive your life expectancy.
  3. Safety & Security – Although nothing in life is guaranteed, the certainty of most annuity payments is very strong.  Most annuities are backed by re-insurance companies (large companies that will be an additional back-up in the case of a default by the annuity provider) or the state.  This leads to a very safe and secure cash stream in most cases.

Lump-Sum

  1. Loss of Cash – You may have a nice stream of income, but losing the lump-sum means losing large chunks of money potentially available for big-ticket purchases or emergencies.  If your child needs to borrow $50,000 for a bridge loan to build a house, your annuity can’t help.
  2. Inflation – The silent killer of a robust annuity payment in early retirement is inflation.  For those of you who skipped Econ 101, inflation is the gradual increase in prices over time.  Most annuities today do not have a cost of living adjustment attached to them so a $3,000 monthly annuity payment today will be $3,000 in 25 years.  That may seem like a decent chunk of change each month when your property taxes are $8,000 a year, but in 25 years when they gradually reach $25,000, you may be wondering where all of your money went.
  3. Estate Planning – The major downside of taking the annuity is the loss of your money.  This means, with few exceptions, if you and your spouse are in the car for a nice Sunday drive the first year of your retirement and are killed in an accident, there will be nothing left for your heirs.  The stream of cash dies with you and this can be very troubling when deciding to give up hundreds of thousands of dollars for a few thousand dollars a month.

When contemplating which pension planning decision is right for you, think about your values and beliefs.  Is it more important to have safety and security or more money and access to it?  Is inflation protection important to you or are you more worried about longevity? This is an important decision, but armed with the right information, you can decide what pension planning strategy will provide you with what you value most. Of course, if the decision seems too difficult, contact a good fee-only financial planner to help you make sense of it all.

Filed Under: Retirement Questions Tagged With: annuities, fee-only financial planner, financial advisor, lump-sum, retirement planners

September 23, 2019 by Ryan Zacharczyk

There has been a lot of buzz around our office lately about Roth IRA conversions. It is a hot topic of conversation in the low income tax environment we are currently experiencing. This blog post will attempt to explain what a Roth conversion is and to give you some insight as to whether or not it is right for you.

If you’re new to retirement savings, IRAs are saving vehicles that allow you to tax efficiently save for your future. A traditional IRA (IRA for the purposes of this article) allows you to set aside money before it is taxed. This money then grows tax-deferred (no tax in the years it is growing) and is then taxed as ordinary income when the money is distributed later in your retirement years. It can be a very powerful & ubiquitous tool for retirement savings.

An IRA does come with a couple of drawbacks. First, all IRA owners are required to begin taking a minimum amount of distributions at age 70 ½ called, appropriately, Required Minimum Distributions (RMD). This annual distribution is based on actuarial life expectancy and can result in withdrawing more money than a retiree needs, thus triggering unnecessary taxes. Second, although the taxes on the growth are deferred until retirement, the entire amount (contributions and growth) will be taxed at your ordinary income tax rate when the money is taken out. This can be a negative as the growth of an investment in a non-IRA account, although taxed when the profit is recognized, is taxed at the more efficient long-term capital gains rates. This means you are likely to pay more tax ultimately on the growth portion of the IRA.

These negatives are certainly not enough to outweigh all of the positives an IRA has to offer, but they should be considered carefully when making financial decisions.

A Roth IRA, on the other hand, is taxed the opposite way. In a Roth IRA, the funds are contributed after-tax and will then grow and be distributed 100% tax -free. Essentially, when you put your money into a Roth, you will never owe a dime of tax again (as long as it is allowed to grow at least 5 years). In addition, there are no RMDs enabling a retiree to take their tax-free money when they need it, not when the government requires them to do so.

Most financial planners love Roth IRAs for their clients for all the reasons mentioned above. Unfortunately, not everyone qualifies for a Roth IRA as there are income limits and the annual contribution amount (even if you are eligible) is far less than that for a 401k or other employer sponsored qualified plan. A Roth can be powerful, but also can be difficult to get money into.

Enter the Roth conversion. A Roth conversion gives an investor the ability to convert some or all of a traditional IRA to a Roth IRA. There is currently no annual limit on how much can be converted unlike Roth contribution limits. Any amount that is converted is recognized as income in the year of the conversion and added on top of an investor’s current income for the year. Unfortunately, we have a tiered tax system in the United States and as such, your income tax rate increases when earnings are higher. This system has made it prohibitively expensive for most to convert their IRA in previous years. That, however, was before the tax cuts of late 2016.

We are now in a period of very low taxes. In fact, a married couple can earn $321,450 and remain in the 24% Federal income tax bracket. This opens the door for many who have been either unable or unwilling to make Roth contributions, to convert some or all of their IRAs to a Roth at a very low tax rate.

Those who choose to do a Roth IRA conversion will not only lock in 2019 tax rates on the amount they convert, but they will never pay taxes on the Roth assets again; not even on the growth of the investments. A conversion of $100,000 for a 45-year-old woman in 2019 can mean more than $400,000 of tax-free money if properly invested when this woman is in her 60s and 70s. That’s powerful.

How can you determine if a Roth conversion is right for you? Unfortunately, this is a bit more complex than it sounds. Even for those already in retirement, a Roth conversion looks like a favorable long-term tax strategy. However, there is far more to consider than just income tax rates. Your adjusted gross income impacts other things such as the tax on Social Security benefits, Medicare premiums, and even capital gains taxes. All of these components should be considered when making the decision to convert or not. If none of these apply to you, then it just becomes a simple calculation of how much you are comfortable converting today and pre-paying the tax on. $1,000? $5,000, $50,000, $200,000? There is no one right answer for everyone. And since it seems as if low tax rates will be here for at least a couple more years (and perhaps longer depending on the 2020 election), then there is time to do your conversion in annual chunks to spread out and reduce the tax burden.

If you are not sure if a Roth IRA conversion is right for you, consider reaching out to a fee-only financial planner, such as Zynergy Retirement Planning, for some expert advice. Your future self will be very happy that you did.

Filed Under: Financial Advisors Tagged With: 401k, fee-only financial planner, retirement, retirement planning, roth ira, simple ira, traditional ira

Primary Sidebar

Zynergy Retirement Planning

  • 732-784-2380
  • 10 NJ-35, Red Bank, NJ 07701

Contact Zynergy Retirement Planning

Schedule a free consultation with a retirement specialist today.

732-784-2380

Footer

Zynergy Retirement Planning

Zynergy Retirement Planning manages more than $110 million in assets for our members with the goal of transparency and unparalleled service.

  • 732-784-2380
  • 10 NJ-35, Red Bank, NJ 07701

Members

  • Member Login
  • About Us
  • Our Services
  • Retirement Enrichment Program
  • Zynergy Cares
  • Contact Us

Retirement Education

  • Dummies Articles
  • 7 Deadly Retirement Sins
  • Zynergy Blog
  • Retirement Q & A
  • Community Scholarship

Get Monthly Retirement Tips

Receive regular news & information vital to your retirement right in your inbox from Zynergy Retirement Planning.

Copyright © 2022 · Zynergy Retirement Planning