Magazine article Business Credit

The Lumps in Lump Sum Payments

Magazine article Business Credit

The Lumps in Lump Sum Payments

Article excerpt

According to the U.S. Department of Labor, more people are taking their pensions in one, lump sum payment than in lifelong, monthly checks. This means independence for those employees who want to make a clean break from their employer and design an investment portfolio that meets their individual needs.

Unfortunately, statistics also show that many employees are ill-equipped to handle the tens of thousands of dollars they may receive in a lump sum payment. As a result, fewer than a third of employees older than 40 put their entire lump sum into a retirement account, and only 16 percent under the age of 40 do. Instead, they are paying bills, starting businesses, buying cars, and incurring tax penalties that wipe out 10 percent of the payment for those under 59.

Spending even a portion of the money you receive from a lump sum payment can dramatically cut into your retirement income, and the less money you start with, the slower it will grow. In addition, income taxes must be paid on the amount you do not roll over, and a 10 percent tax penalty may apply to any money not rolled over if you are under age 59 (or age 55 if you have separated from service).

What's more, you simply can't rely on benefits such as Social Security or other pension plans to supplement your income in retirement anymore. In fact, according to the Employee Benefit Research Institute (EBRI) in 1996:

* the percentage of an elderly individual's income derived from Social Security declined to 42. …

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