How to Choose Between a Pension and Lump Sum Payout

Then there are the emotional and behavioral issues. “That lump sum can seem like a lot of money — but it carries risk that can shortchange retirees,” says Karen Friedman, executive vice president of the Pension Rights Center, a nonprofit consumer advocacy group. Consider this: Of those who took the lump-sum option, 1 in 5 depleted that money within five and a half years, according to a study by MetLife. An additional 35 percent were concerned that the money would run out.

When cash makes sense

So how to decide? Experts say you should seriously consider the lump sum if:

You are worried about your employer’s financial state. This is a particular risk if you’re in the public sector, you work for a religious organization or you’re in what’s known as a multiemployer plan. Otherwise, if your private-industry employer goes bankrupt, the Pension Benefit Guaranty Corporation would likely replace your payments in full up to certain age-based limits. For example, a 60-year-old retiring this year and due a pension with no survivor’s benefit would receive at most about $4,387.50 monthly from the PBGC.

You are comfortable investing. If investing and overseeing your personal finances is something you’re already doing, or if you have a financial adviser you know and trust, taking the lump sum offers significantly more flexibility and potentially more upside. Note that a financial adviser — whether scrupulous or not — might have a vested interest in your taking the lump sum in order to gain the business of investing it. So consider hiring a financial planner on a onetime project basis, says Guay, to map out the strengths and weaknesses of either choice, given your specific financial situation.

You don’t need the money. If you (and your spouse, if married) are already covered for retirement funding — perhaps from another pension or retirement plan, or an inheritance — taking control of the money allows you to spend, give away or save as you choose. Roll the money directly into an IRA or your 401(k), and you’ll defer paying taxes on it; an extra advantage of the 401(k), if you’re between the ages of 55 and 59½, is that you won’t pay an extra 10 percent penalty on withdrawals.

When a pension makes sense

Truth is, annuities are often the better deal, says Bob Kargenian, an Orange, California-based financial adviser, noting that companies offering these buyouts are doing so to help their bottom line, not yours. Be sure to consider the annuity option if:

You’re married. “If you are the retiree and take a lump sum, it’s not just you who can outlive your money,” Friedman says. “Think about your spouse.” Traditional pensions allow for a joint-and-survivor option; in return for a lower monthly payout, the retiree’s spouse, if surviving the retiree, is guaranteed to receive income for life — perhaps 100 percent or 50 percent of the prior benefit. Since women typically live longer than men, losing this benefit can hurt the wives of men due a pension.

You’re a spender. Be honest: If a big pot of money will be hard not to tap — whether for a vacation, helping out adult kids or any other reason — you may appreciate the discipline imposed by a pension.

The decision is causing you anxiety. Knowing that your monthly payments won’t run out can give you great peace of mind. (Remember, though, that most pension payments do not adjust for inflation, so your buying power will erode over time.) With a pension, “the payments are just there,” Friedman says. “That’s why they are so good.”