November 22, 2013
When going through the financial planning process, it's easy to become fixated on the numbers. You worry about expected returns, taxes, maximizing income, etc. The numbers are very important.
One specific example is comparing pension payout options. We look at taking a lifetime annuity vs. taking a lump-sum, that we will then invest with a focus on generating income. If the lifetime payout is higher than what we can reasonably expect to earn from investing the lump-sum, then we take the annuity, right? Plus its guaranteed for life - such a no brainer.
But is it that simple? The math says yes. But what about some of the intangibles that cannot be quantified? In this case, taking and investing the lump-sum might not provide the maximum annual income and the investment results may deviate from what we expect.
But if the client takes the annuity, they would lose access to the pool of money they'd have with the lump-sum. You could never say "Hey, I need an extra $5,000 this month for our vacation." Or, "I don't need that much this month. Keep it invested and tax-deferred for me." You get the same amount each month no matter what.
This is why it's always important to weigh the tangible, quantifiable factors, and also the intangibles, such as having greater control over your retirement savings.
Sam DiNorma, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).