Pension as Lump Sum, Optional - a choice

I received an “offer” from a former employer of 27 years to pay out my lifetime pension as a lump sum. For privacy reasons I will obfuscate amounts; I have run some PV/FV numbers but I’m interested in others’ takes, especially @aj485 if willing.


  • I am just past 59.5. The annual annuity amount goes up about 6% per year until I turn 65 when it caps. My wife is just now 65.
  • I’m assuming (despite my father’s side history) we will both live at least 20 more years. My wife and I are both active and blessed by very good health (helped by medications for BP, cholesterol).
  • the lifetime pension annuity covers about 30% of my base living expenses. Both of us will get SS. Between the pension and the two SS, I expected we would have 80% of our expenses covered and be able to draw max 4% a year from our IRAs to cover the rest including travel. At those projections, even with a “significantly below average market return” calc in Fid’s forecasting tool, we wouldn’t come close to burning down to 0 in 25 years.**
  • I’m still working. Hoping to walk from full time in 1 1/2 to 2 years.

Their offer equates to @13 years of those payouts, assuming point 1% growth.

If I invested the lump sum at 4.9% AAR, and withdrew the same fixed amount they would pay, the money forecasts to last until I am 85 & she’s 90. Needless to say, there’s all kinds of market risk associated with any such return assumption. Of course, it appears they basically took the current 12month Treasury yield and assumed that would be AAR. A reasonably conservative estimate - but the starting SWR is 6.5% to withdraw the same amount as the annuity.

They appear to have drawn a line at a life expectancy of around 76 me/81 spouse. If I were to keep the annuity, and we lived to 85-90, the company would be paying out 60-70% more over our lifespan than the lumpsum offer. That has to be why they’re “offering” it. They’re trying to transfer the longevity risk to us.

I’m in the 24% marginal tax bracket and will not go higher.

My draft calculation says - don’t take it, start taking the annuity in '24 or '25 when I want to go part time. 13% increase from now if I wait to 1/2025.

Please feel free to contribute helpfully with my decision making.

MonteCarlo at Portviz: Monte Carlo Simulation

  • in their offer they of course say “you may not get another lump sum offer and we reserve the right to terminate the plan at anytime.” (I have to believe they legally could not terminate & pay out 0, this large llama-like company is extremely financially stable, fanatical about expense management and not near bankruptcy / the PBGC bailout). As well, they stopped additions to this plan @10 years ago, grandfathering those who had been in it - and working hard at early-retiring long-time employees.

**catastrophic medical event excluded, we’ll have supplemental Medicare but not “Advantage”.

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I think one thing you have to think about is what if the company goes bankrupt? If you are a pilot with a large pension that can be reduced. If you have a pension of under 54,000 you will be fine unless the government goes broke. Over that amount you could have some of it reduced. Some companies have their pensions insured by an Insurance company so that is something to look into also.

Company Is Going Bankrupt. What About My Pension? - Good Financial Cents®.


It pays to check what happens if one of you suddenly dies. Many people who switch the next January to filing as “single” fidn themselves in a higher bracket.

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Most think lump sum is the better choice. Pension is usually based on conservative investments. You can probably do better in an ira. And no worry about the future of the company or its plan.

After talking to my FA at Fidelity, the better option is to continue with this as a pension and not take the lump sum. The guaranteed (even if by PBGC) monthly income is much more than what I could take as a SWR and the income at our entering-retirement time is imperative.


That is the conservative choice. PBGC is better than nothing but many find the guarantee is small compared to their regular pension.

Will the company put yours in an annuity? If yes, insurance company guarantees payment. Not 100% sure but they claim everyone always gets their money.

Otherwise, company can cancel pension at any time. Leaving you with whatever PBGC carries. Many lose health insurance this way.

Lump sum to IRA lets you control funds. Out of company hands.

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We, all LU pensioners, were offered a total buyout, they held seminars around the country, and it was a decent amount, obviously management offers were higher than us techs, so it was tempting, many managers jumped on it as they had already lost their health benefits, so were OK with it… But as I looked at the time, I found investments that could cover the actual pension, but not the benefits, is we declined… Many at the seminar we were at had been warehousemen, clerical staff, had gone on to other jobs, businesses of their own, so did also take the offer made…

So far so good, LU went on to become Alcatel-Lucent, and today is Nokia, and the checks are still coming in OK… Another separate group, Avaya retirees, not so lucky, they ended up using the PBGC option… I don’t have any direct connection with any of those folks, but it’s good to know it is there as a backup if ever needed, but so far our fund is still in good shape…

Life has no guarantees, none of us ever thought the Bell System, or our WeCo/Lucent spinoff would collapse. We have Carly & McGinn to thank for it, IMHO…


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The company is basically providing an annuity. The quotes from other insurance cos for annuitizing the lump sum were $400-$500 a month LESS than the original pension. There are a few other reasons I’ve decided to leave it as a pension, most importantly if I box early my wife will continue to get the 75 or 100% survivor option. The company (Liberty Mutual) is not going away.

If the guaranteed monthly income is inflation adjusted, then you can reasonably compare it to an inflation adjusted SWR. If not, the comparison isn’t apples to apples. Additionally, perhaps SWR shouldn’t be the comparison anyway because SWR never terminates (the money remains yours or your heirs), the pension terminates at death. The residual money has to be accounted for somehow in the comparison.

Perhaps a valid comparison would be comparing pension to an annuity of some sort. In that case, the pension will likely be better because annuities have higher fees than pensions do (actual fees or built-in fees). I see you mentioned that above, and it is almost always the case.

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Thanks @MarkR - good point about the SWR comparison. For clarity on the residual money element: the lump sum would be drawn to 0 in 14 years if I withdrew the same as the pension payment; less time if I waited, leading to the fixed end age forecast of about 74 - a “bet” by them against living longer than that.

Alternatively if I SWR’d the lump sum, I’d have to take less than 1/2 of the pension payment to make the lump sum last as long as 85 at market-average or slightly below-average returns.

They didn’t make it an easy choice as you can see!

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Hi @FlyingCircus,

I received a lump-sum offer when I was 65. My pension was small because I left the company at the earliest date I could to still qualify for a pension. I had set it for 100% to my wife on my demise which made it even smaller. It had no inflation adjustments.

To figure things out, I made a simple spreadsheet that started with the payment and started taking monthly “payments” along with a growth amount. The growth percentage was in a cell at the top so I could vary it and see the changes.

I found I could more than reproduce the payout level and have a small residual using a 3.7-ish percent annual increase. At around 5.5% (IIRC), I retained the capital amount.

So I took the lump-sum in November 2015 with the next 6 years being a phenomenal market to be invested in.

Does that help you?

All holdings and some statistics on my Fool profile page (Click Expand)

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Sorry that I’m late to this thread, but I would point out that pension payouts for the same circumstances now are significantly less than they would have been a few years ago, because of the interest rate increases. I looked at the possibility of taking a lump sum on a small pension that I am eligible for a few years ago and chose not to at that time. I recently looked at the possibility again, and the offer was significantly lower than the offer I received back then, even though I am now several years older.

In the current interest rate environment, I would probably choose not to take a lump sum payment, and would either annuitize the pension, or if another offer is provided in a future interest rate environment that is more favorable, I would evaluate the offer at that time. That said, my pension caps out on my birthday in 2024. My plan at this time is to annuitize the pension starting Jan 1, 2024.



Thanks @aj485. The perverse part of pension math to me is, interest rates increase = lump sum decrease? Because…why? The company can invest their reserves at a much higher safer rate than a couple of years ago, so they’re earning much more on their reserves - increasing the funding percentage. Are they borrowing money to fund their pension obligations, and that’s the rub?

FWIW I’m still 5 years away from my cap - but, it’s only a few $K a year more, and I’m in the camp of, get out of full time work sooner, enjoy life with my wife & DD a bit, take non-related jobs & volunteer opportunities in the winters. Looking at max 15 months out to start.

The lump sum you are being offered is based on the NPV of the pension income stream based on an average life expectancy and current interest rates. As interest rates increase, the NPV decreases, so the lump sum being offered decreases.