Most retirement decisions can be revisited. This one is different.
When a pension plan offers you a choice between one large lump sum and a monthly check for the rest of your life, the box you check usually becomes permanent. The Pension Benefit Guaranty Corporation (PBGC) says it plainly for the pensions it pays: after your first payment, you cannot change your selection.
Here is how to think it through.
Who faces this choice
- Corporate retirees with a traditional pension. Many plans offer a lump sum at retirement, and some companies send one-time buyout offers to former employees.
- Military retirees under the Blended Retirement System (BRS). At retirement, BRS members can elect to receive 25% or 50% of their retired pay as a discounted lump sum. In exchange, monthly retired pay is reduced by that same percentage until full Social Security retirement age (67 for most), when full retired pay resumes. You can take the lump sum in one payment or up to four annual payments, and the Department of Defense notes that a lifetime of full monthly payments may be worth more than the discounted lump sum.
- Federal employees under FERS. The FERS basic annuity is generally paid monthly, so this exact choice may not apply to you. Your version of this decision is often the TSP, where you can take installment payments, withdrawals, or an annuity that cannot be changed once purchased.
A paycheck or a pile of money
The monthly option is a paycheck that keeps coming no matter how long you live. Private pensions are generally insured by the PBGC up to legal limits, and the Consumer Financial Protection Bureau (CFPB) notes that pensions also carry some protection from creditors. Many private pensions do not adjust for inflation, and the PBGC does not adjust the pensions it pays for inflation, so ask your plan whether yours has a cost-of-living adjustment.
The lump sum is control. You can invest it, pay off debt, and leave what remains to your family. But the job of making it last moves from the plan to you. As the PBGC puts it, with a lump sum, “You may outlive your retirement funds.”
Hypothetical example for illustration
At 65, a retiree is offered $2,000 a month for life or a $300,000 lump sum. Before any investment growth or taxes, $300,000 equals 12.5 years of those checks. If she lives past about 77 and a half, the monthly option has paid more. If she invests the lump sum, the result depends on returns, withdrawals and timing.
The real question is not which number looks bigger. It is how long the money needs to last, and who will be managing it when you are 85.
Five questions to answer before you sign
1. How long might you need this income? The CFPB notes that monthly payments matter more if you or your spouse are in good health or come from a long-lived family, and a lump sum may fit better if your health is very poor or other income already covers your basics.
2. Who will manage the money at 80 or 85? Investing a large sum takes skill and steady nerves, and both can change with age.
3. What does your spouse give up? For married participants in private plans, the default payout is generally a joint and survivor annuity, which keeps paying your spouse after you are gone. Choosing a lump sum or a single-life payment generally requires your spouse’s written consent, witnessed by a notary or a plan representative. Make this decision together.
4. What would it cost to buy that same paycheck yourself? This is the question that’s easiest to overlook. Ask for quotes on how much monthly lifetime income your lump sum would buy as an income annuity, from more than one insurer. If it buys less than your plan already promises, the plan’s paycheck may be the better deal. If it buys more, or comes with features you value, the lump sum deserves a closer look.
5. How will taxes work? A lump sum paid directly to you is generally taxed as ordinary income. The CFPB notes that employers withhold 20%, and a 10% early withdrawal penalty may apply before age 59½. A direct rollover to an IRA can generally defer the tax. For BRS members, the lump sum is taxable and may push you into a higher bracket in the year you receive it, and VA disability compensation may be reduced. No-cost financial counseling is available through Military OneSource and your installation’s Military and Family Support Center.
The detail that changes the number: interest rates
Pension plans convert your monthly benefit into a lump sum using interest rates set under IRS rules. Higher rates generally mean smaller lump sums, and lower rates mean larger ones. Some plans lock the rate for a full plan year, and others reset it more often. Ask your plan administrator which rates apply and when they reset, because timing may matter only if the rate changes before your payment starts.
It does not always have to be all or nothing
Some plans let you split the benefit, taking part as a lump sum and part as monthly income. You could also take the lump sum, roll it over, and use part of it to create your own guaranteed income. The right mix depends on what your other income already covers.
Three ways people get this wrong
- Deciding by the size of the number. A six-figure check feels like more than $2,000 a month. Over a long retirement, it may not be.
- Deciding alone. This choice affects your spouse’s income for the rest of their life.
- Deciding fast. Some buyout offers come with short deadlines. Get your benefit statement and check the math before the window closes.
The bottom line
We believe in the value of a paycheck you cannot outlive. But a lifetime pension is not the right answer for everyone, and neither is a lump sum. The right answer is the one you choose with real numbers, your spouse at the table and enough time to think.
For help seeing how your pension fits with the rest of your income, join us for our complimentary Executive Retirement Briefing, “Is Your Retirement Actually Positioned?”
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This article is for educational purposes only and is not individual tax, legal or investment advice. Pension rules, payment options and lump sum calculations vary by plan. Military retirement elections depend on your service and retirement system. Annuity guarantees depend on the claims-paying ability of the issuing insurance company. Shateka Husser Financial Solutions offers insurance and annuity products. This article is educational and is not a recommendation to buy or sell any product.
