Should I Take the Lump Sum Option from My Pension?

Key Points for Pension Options

  • Choosing between lifetime income or a lump sum is a crucial and complicated decision. Make sure to consider the pros and cons of all of your options.
  • When comparing lifetime income instead of a lump sum one isn’t universally better. The best choice depends on your individual circumstances.
  • A lump sum gives you more flexibility and control, but also more responsibility for managing the proceeds.
  • Consider running a Pension Optimizer Analysis on your individual situation.

My first thought is congratulations! A pension in any form—whether taken as a lump sum or lifetime income is a valuable and increasingly rare benefit. This is an important retirement decision. So take your time and weigh your options carefully.

I would like to reiterate that one choice isn’t universally better than other options. The best choice for you depends on your individual circumstances.

Here are some things to consider:

Understand the Math

Compare the raw numbers. As an example, let’s say you’re deciding between:

  • $300,000 lump sum or lifetime income of $2,000 per month
  • The lifetime income option amounts to an annual return of 5.17 percent if you live another 20 years.
  • If you take the lump sum and invest it on your own, you’d have to earn an average annual return of 5.17 percent to equal income of $2,000 per month for 20 years.

This isn’t quite an apples-to-apples comparison. The lifetime income payments include return of the original pension balance along with investment returns. Additionally, it guarantees you receive the same  income if you live beyond 20 years. The 5.17 percent from investing the lump sum rollover is a return on your money. Your investment results may be better or worse —with no guarantees.


Cost Of Living Adjustment (COLA)

Does your pension have a cost-of-living adjustment (COLA), which increases your payments to keep up with inflation?  Without a COLA, you can lose purchasing power over time.


Will your income needs be consistent through your retirement, or will you spend more money in your first 10 years of retirement?  Many retirees spend more money in their early years of retirement, then less money in their 70’s.  A lump sum option provides more flexibility to adjust your spending in retirement.

Your Health and Life Expectancy

If you take the lump sum, the longer you live beyond 20 years, the higher your annual return will need to be to match the lifetime income payments. Conversely, the shorter your life, the more valuable the lump sum. Take an honest look at your health and family history of longevity as you make your decision.

Think About the Impact on Your Loved Ones

If you choose lifetime income, you have choices that reduce your monthly payments but pay lifetime income to your spouse. A lump sum, on the other hand, could provide more flexibility or benefits for your spouse.

Also, if you pass away unexpectedly, the lump sum option would be distributed to your children/beneficiaries.

Consider the Rest of Your Finances

If you have considerable financial resources—brokerage, 401(k), IRA—and other sources of reliable income (for example, Social Security or rental income) you may have less need for another source of lifetime income.

Be Honest About Your Investing Skills, Interest and Desire for Control

Managing a lump sum takes skill and discipline. If you work with a financial advisor or are an experienced investor and are willing to put in the time, the lump sum could be a good fit.

Weigh Your Risks

Either choice involves a degree of risk.

  • If you choose a lump sum, your employer transfers investment risk to you. You could do better—or worse—than the lifetime income option.
  • On the other hand, there are risks with choosing lifetime income—for example, dying prematurely, missing out on better investment returns or having       the pension assets lose value if the plan isn’t adequately funded.

Choosing between a lump sum and lifetime income payments is a complicated decision.

As you weigh your options, it can be helpful to consult with a financial advisor and utilize a Pension Optimizer Analysis (see sample below).

Whatever you decide, congratulations on your retirement. You’ve worked many years to earn your pension; now you get to enjoy its benefits.

About Wood Tarver Financial Group.  We are Boise based advisors and Fiduciaries focused on meeting the needs of today’s baby boomers and their retirement planning/income needs.  Our advisors implement a customized, holistic approach to retirement, including planning for Investment Income, Social Security, Medicare, Taxes and Estates.