Pension Lump Sum vs Monthly Payments: How to Decide

Many pension plans offer retirees a choice: take monthly payments for life, or receive a one-time lump sum. This is often one of the largest financial decisions you'll ever make - and it's usually irrevocable.

• Monthly payment: Guaranteed income for life (like Social Security)
• Lump sum: One-time payment you invest and manage
• Decision is typically permanent - choose carefully
• No universally "right" answer - depends on your situation
• Involves trade-offs between security and control

Monthly pension payments provide security that's hard to replicate.

• **Guaranteed income**: Can't outlive it, regardless of market conditions
• **No investment risk**: Company/PBGC bears investment risk
• **Simplicity**: No investment decisions, rebalancing, or management
• **Inflation protection**: Some pensions include COLA (Cost of Living Adjustment)
• **Spousal protection**: Joint & survivor options protect your spouse
• **Creditor protection**: Pension payments often protected from creditors

Lump sums offer control and flexibility the monthly payment doesn't.

• **Control**: You decide how to invest and when to withdraw
• **Inheritance**: Remaining balance passes to heirs
• **Flexibility**: Access to capital for emergencies or opportunities
• **Portability**: Move it to IRA, invest in gold, real estate, etc.
• **Tax planning**: Manage withdrawals for optimal tax brackets
• **Company risk eliminated**: No concern about employer bankruptcy

Calculate the implied interest rate the pension is offering, then compare to what you could earn.

1. 1Get the monthly payment amount and lump sum offer in writing
2. 2Calculate annual pension income (monthly × 12)
3. 3Divide annual income by lump sum = implied interest rate
4. 4If rate > 5-6%, monthly payments are usually favorable
5. 5Factor in life expectancy - longer life favors monthly
6. 6Consider spouse's needs if you have joint options

Consider these factors in your decision.