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What Should I Do With a Lump-Sum Distribution From My Cash-Balance Plan?

While contemplating what to do with a lump-sum distribution from a cash-balance plan, it is essential to understand the alternatives at your disposal. The first instinct for many recipients is to seize this windfall and spend it right away, but a careful analysis is critical.

One alternative to the lump-sum option is opting for a lifetime income annuity. A lifetime income annuity offers you financial and psychological benefits by ensuring a guaranteed income throughout your life. Though it might appear that having access to more money upfront would offer greater value, the comfort of a sure, lifelong income shouldn't be underestimated.

Prudent Management: Handling a Lump-Sum

For those who choose to take a lump-sum, prudent management is vital. A substantial portion of this lump-sum distribution should be allocated towards wise and secure investments. Navigating through these financial waters might appear overwhelming, but a well-planned approach can help ensure your financial stability.

Crafting an Income Strategy

Before you commence drawing income from your investment, developing a wise income strategy is key. This might entail spending only gains and dividends or adhering to a safe withdrawal rate. Safe withdrawal rates are guidelines that estimate what proportion of an investment account you can draw each year to ensure your retirement nest egg lasts.

In the context of low-interest rates, the safe withdrawal rate may be even lower. Presently, income experts approximate that a safe withdrawal rate is around 3-4%, considering the current risk-adjusted returns retirees can expect. However, it requires significant self-discipline to maintain withdrawals within these limits.

The Risks of Overspending

Overspending from a lump-sum distribution could prove detrimental as healthcare costs and inflation start chipping away at your savings. With increasing life expectancy, it's possible that you may need your savings to last for 40 years or more. It's at this stage that lifetime income might seem increasingly appealing, especially with guaranteed withdrawal rates as high as 7% for the rest of your life.

Deciding between a lump-sum or annuity from your cash-balance plan is not a simple task. Both options have their pros and cons. Therefore, it's crucial to weigh your options carefully, taking into account your financial needs and lifestyle. If you decide to take the lump-sum route, remember the importance of wise investing and prudent spending. By doing so, you'll ensure that your distribution provides you with a comfortable and financially secure retirement.


Lump Sum distributions can allow you to invest according to your preferences, but could also be used frivolously and spent down in a short time.

The first thing to keep in mind is that it’s very easy to spend a lump sum right away without thinking about the consequences. While the monthly payment option protects your money from overspending, many people feel that they would derive a greater value from having access to more of their money.

This could potentially be the case, but people often underestimate how much value there can be in a lifetime income annuity. Retirees experience psychological benefits as well as financial benefits by knowing that they have a certain income guaranteed for life. A lump sum should be handled with frugality and practicality. A large portion of this amount should be invested safely and wisely.

When you are ready to draw income out of it, you need to research a wise income strategy and attempt to stick to it. This may mean only spending gains and dividends, or sticking to a safe withdrawal rate. Safe withdrawal rates are estimations of what percentage of an investment account you can withdraw a year and have your money last through retirement. (To learn more about spending dividends, see “What is Dividend Adjusted Return?

When interest rates are low, the safe withdrawal rate is a little lower as well. Today income experts estimate that about 4%, but even as low as 3%, is the safe withdrawal rate based on the current risk-adjusted return that retirees can expect. Most retirees are unwilling to use enough self-discipline to keep withdrawals around the safe withdrawal rate.

This can be a terrible mistake when healthcare costs and the effects of inflation start to take their toll on the retiree’s nest egg. People are living longer today than ever before, and you may have to try to make your money last for 40 years or more. Lifetime income starts to sound better and better, especially when they can guarantee withdrawal rates around 7% and up for as long as you live.

What is a Lump-Sum Distribution from a 401(k)?
Can I Take a Lump-Sum Distribution From My Pension Plan?
What role does inflation play in my retirement planning?

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