Magazine article Black Enterprise

Should You Choose a Lump-Sum Pension Payout? Here's How Entrepreneur Ramona Harper Decided

Magazine article Black Enterprise

Should You Choose a Lump-Sum Pension Payout? Here's How Entrepreneur Ramona Harper Decided

Article excerpt

The days of working until you're 65 and then retiring to collect a monthly pension check for the rest of your life are over. As more and more companies get rid of their pension plans, some offer their employees the choice of a lump sum or a monthly payout. If you're ever in that position, which should you choose?

Ramona Harper faced this very choice in 1997. Her employer of 10 years, an educational corporation, had just downsized her. The now former vice president of marketing and admissions decided to go with the lump-sum payout of $185,000, and use it to start a business, rather than take a monthly payout of roughly $800 for about 15 years. "I thought the best option was to invest in my own company and to generate much more money in the long run than just take the monthly payout," Harper says.

She used $110,000 to start her accessories boutique business and put the rest of the money into a small business 401 (k), which she, as a business owner, opened herself, avoiding a tax hit. Startup costs included purchasing merchandise such as jewelry and decor items. "I decided after doing a lot of research and listing pros and cons. I calculated what my monthly expenses would look like when I retired. I looked at the absolute minimum that I could possibly live on," Harper says. She also had about $20,000 in personal savings.

"When I decided to venture out and use my pension money to start my own business, I also knew that I was pretty much going to live or die by that decision. I was going to have to take that business and turn it into what I would live off of for the rest of my life," says Harper.

Lump Sum or Monthly Payment? Here's What You Should Know.

Under what circumstances would a company offer a lump sum pension payment?

In the past, corporations didn't offer lump-sum pension payouts too often. Today, it's becoming unattractive for employers to offer monthly payouts because they are trying to avoid future pension liabilities. They prefer to give employees all the money up front. They give the employees all the money to shift the risk of the market from the employer to the retiree. In a defined benefit plan, If the market doesn't do well, the company has to make up the difference--that's a liability to the company. …

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