Should I Take the Lump Sum Option From My Pension?

Carrie Schwab-Pomerantz on

Dear Carrie: I'm about to retire, and I have to decide between taking a lump sum or lifetime income payments for my pension. I'm leaning toward the lump sum. Is this a good idea? -- A Reader

Dear Readers: My first thought is to say congratulations! A pension in any form -- whether taken as a lump sum, as lifetime income (sometimes called a pension annuity) or as some combination of both, is a valuable and increasingly rare benefit. This is an important retirement decision. Take your time and weigh all the options carefully. A lump sum can seem alluring, no doubt, but consider tax implications as well as the potential benefits of spreading out payments over a longer period of time.

I also want to point out that one choice isn't universally better than others. The best choice for you will depend completely on your individual circumstances. Let's take a look at some of what you need to consider before making this very important decision.

Start by Understanding the Math

As you start to do your analysis, it can be helpful to compare the raw numbers. As an example, let's say you're trying to decide between a $300,000 lump sum or lifetime income of $2,000 per month. This amounts to an annual return of 5.17% if you live another 20 years. In other words, if you were to take the lump sum and invest it on your own, you'd have to earn an average annual return of 5.17% to equal income of $2,000 per month for 20 years.

However, this isn't quite an apples-to-apples comparison. The lifetime income payments include a return on some of the original contributions along with investment returns. Additionally, it is guaranteeing you'll receive the same amount of income if you live beyond 20 years. The 5.17% from investing the lump sum is a return on your money. Your actual investment results may wind up better or worse that this -- with no guarantees.


Complicating the analysis is whether income from your pension has a cost-of-living adjustment (COLA), which can increase your payments to help keep up with inflation. This is a major factor because, without a COLA, you can lose considerable purchasing power over time.

Your Health and Life Expectancy Are Key

Let's continue with the example above. 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 before you make your decision.

Think About the Impact on Your Loved Ones


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