Pension vs. Lump Sum

Pension vs. Lump Sum

September 22, 2020 – Two related AARP Bulletin articles may have bearing on your retirement plans. In short, companies are temping retirees with offers to pay their retirement benefits as a single, commuted lump sum instead of honoring their monthly pension obligations.

If you or anyone you know works for an organization that even offers a pension anymore, it’s worth your time to thumb through two recent articles:  “Treasury Department OKs More Lump-Sum Pension Payments” and “Pension or Lump Sum?”

A few highlights from these articles:

According to a MetLife study, 20% of those who opted for the lump sum spent the entire sum within five and a half years.

Of those who weren’t broke by then, 35 percent worried they would run out of money.

Most economists warn that people can rarely, if ever, replicate the security of a pension.

Less ethical financial advisors may be biased against the pension since they can benefit from investing your money.

Lump sum buyouts tend to benefit the company offering them more than the individual receiving them.

(NOTE: The articles don’t even mention taxes which would also be a consideration)

COVID-19 likely hasn’t left its final impression on our economy yet. As such, businesses with pension obligations may find themselves forced to accelerate layoffs, early retirements, or staff reductions to remain financially viable. Wise retirees-to-be will want to be prepared.

Compare Before Deciding

There may be many non-financial reasons for choosing a lump sum over the pension payments, but if you are confronted with the choice, how do you determine whether the pension or lump sum buyout is the better deal?

After reflecting on the information contained in these articles, a sensible move is to ANALYZE VALUES by comparing if the pension payments you’re forfeiting can be replicated in the marketplace with the lump sum you’re being offered.

We can help you estimate the fair market value of your pension.

Call us before you commit.

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For Example:

A 60-year-old female in Pennsylvania is offered early retirement by her company. Her employment contract requires the company to pay her a monthly retirement benefit of $1,000 for as long as she and/or her 60-year-old spouse live. (NOTE: Assumes an opposite sex couple in this example. Although different actuarial tables would be applied in most states when calculating values for same sex spouses, the same analysis is used).

Before completing her retirement paperwork, the company tells her she has the option of taking her retirement in a single lump sum instead of the monthly income and they offer her $225,000.00.

Is this a good deal?

Could they replace $1,000 a month for $225,000?

A quick survey of life companies rated A+ or better by A.M. Best reveals it would cost approximately $275,000 to replace the pension this couple would be giving up. As such, the short answer to this question is, no, the employer is not offering them market value for the pension.

On the other hand, let’s assume the company offered her $325,000 for the same $1,000 per month lifetime benefits. In that instance, these folks would be better off taking the lump sum because they could buy a traditional annuity that would pay lifetime income which EXCEEDS $1,000 per month for lump sum offered.

A decision on whether to accept a lump sum payout in exchange for your future pension benefits should not be based on pricing alone. But people always like knowing if they’re being treated fairly so assessing value is a good starting point. You might be surprised.

I have no problem confessing our firm’s bias: Generally speaking, sticking with the pension will be the better choice. We’re big fans of secure income you can never outlive. That said, these articles provide solid practical tips for deciding what your best option will be. Everyone’s situation is different.

Whatever you do, don’t end up with an empty nest egg. There may be valid reasons to choose the lump sum over the pension benefits. But our advice is to think long and hard before doing so.

Photo courtesy of Luke Brugger at



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