Pension vs Lump Sum: How to Make the Right Decision
Monthly payments for life or one big check? Here's the framework to decide.
Key Takeaways
- 1Break-even analysis shows how long you must live for pension to win mathematically.
- 2Health and family longevity are critical factors in this decision.
- 3A lump sum dies with you (or spouse); consider heirs in your decision.
- 4Fixed pensions lose purchasing power to inflation over 20-30 years.
- 5Your spouse's financial security should be a major consideration.
- 6There's no universally "right" answer - it depends on your situation.
Break-Even Analysis
The simplest way to compare: how many years until pension payments equal the lump sum?
- **Simple formula:** Lump Sum ÷ Annual Pension = Break-even years
- **Typical break-even:** 12-15 years
- **Average 65-year-old lives:** 18-20 more years
- **Reality:** Investment returns and inflation complicate this math
| Lump Sum Offered | Annual Pension | Break-Even Years |
|---|---|---|
| $200,000 | $18,000 | 11.1 years |
| $300,000 | $24,000 | 12.5 years |
| $400,000 | $30,000 | 13.3 years |
| $500,000 | $36,000 | 13.9 years |
Real Example
John, 62, is offered $350,000 lump sum or $2,400/month ($28,800/year) pension. Break-even: 12.2 years. If John lives past 74, the pension wins mathematically. But if he invests the lump sum at 6% return, break-even extends to 18+ years.
Health & Longevity Factors
Your life expectancy dramatically affects this decision:
- **Family history:** Did parents/grandparents live into their 80s or 90s?
- **Current health:** Chronic conditions may shorten life expectancy
- **Lifestyle factors:** Smoker? Active? These matter
- **Healthy = pension often wins:** More years to collect payments
- **Health issues = lump sum may win:** Maximize what you can leave to family
Be Honest With Yourself
This isn't a pleasant topic, but it's crucial. A 65-year-old man with diabetes and heart disease has different math than a healthy 65-year-old woman whose mother lived to 95.
Spouse Considerations
If married, your spouse's security is paramount:
- **Single-life pension:** Higher monthly payment, dies when you die
- **Joint-survivor pension:** Lower payment, continues for spouse
- **Lump sum advantage:** Remaining balance goes to spouse/heirs
- **Consider age difference:** Younger spouse may need income for decades
- **Pension with life insurance:** Some use lump sum for insurance to protect spouse
Critical Question
If you take single-life pension and die next year, what happens to your spouse? The pension stops. Make sure you have a plan.
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Inflation Risk of Fixed Pensions
Most private pensions don't adjust for inflation:
- **Fixed pension problem:** Same check every month for life
- **Inflation at 3%:** Purchasing power cut in half every 24 years
- **Lump sum advantage:** Can invest for growth to outpace inflation
- **Some pensions have COLA:** Check if yours adjusts for cost of living
| Year | $2,000/month Buys Today | At 3% Inflation |
|---|---|---|
| Year 1 | $2,000 purchasing power | $2,000 |
| Year 10 | $1,489 purchasing power | $2,000 (same check) |
| Year 20 | $1,107 purchasing power | $2,000 (same check) |
| Year 30 | $824 purchasing power | $2,000 (same check) |
Decision Framework
Use this framework to guide your decision:
| Factor | Choose Pension If... | Choose Lump Sum If... |
|---|---|---|
| Health | Excellent health, family longevity | Health concerns, shorter expected life |
| Spouse | Good survivor benefits | Want to leave assets to spouse/heirs |
| Other income | This is your only guaranteed income | Have Social Security, other savings |
| Risk tolerance | Want guaranteed income, sleep well | Comfortable managing investments |
| Inflation | Pension has COLA adjustment | Fixed pension, need growth |
| Company | Strong, stable employer | Concerns about company/PBGC |
Get a Second Opinion
This is one of the biggest financial decisions of your retirement. Consider paying a fee-only financial advisor (not one who earns commission) to review the numbers with you.
If You Choose Lump Sum: Consider Gold
A lump sum gives you control - and responsibility. Gold can help:
- Roll lump sum to Gold IRA for inflation protection
- Physical gold maintains purchasing power over decades
- Diversify beyond stocks and bonds
- Protect against the market crashes that devastate traditional portfolios
- Leave tangible assets to heirs
Frequently Asked Questions
1Can I change my mind after choosing?
Generally no. Once you elect lump sum or pension, the decision is irrevocable. Some plans offer a brief window to change, but don't count on it. Decide carefully.
2What if my company goes bankrupt after I choose pension?
PBGC insures most private pensions up to a maximum benefit (around $6,750/month at age 65 in 2026). If your pension is below this limit, you're fully protected. Higher pensions may be reduced.
3Should I take lump sum just because I don't trust the company?
Maybe. If the company is financially shaky and your pension exceeds PBGC limits, a lump sum eliminates that risk. But if your pension is well below PBGC limits, the insurance protection is strong.
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