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Obviously, this depends on individual situation. I faced this dilemma in 2023, when I retired. There are pros and cons for each. Many of my colleagues opted for lump sum. That seemed to be the most popular thing to do. I was one of the few who opted for monthly payment.
With Social Security and monthly pension, which cover my expenses, I can be more aggressive with investing our nest egg. I don’t need to worry about funding expenses from investments in the midst of market fluctuations. So far, I have been very happy with this decision.
What has been your experience? What would be your advice for someone faced with this choice?
Sundar Mohan Rao
This is a situation where a profit-driven corporation makes a limited time offer to former employees to accept a sum of money in return for a lifetime of monthly payments. The corporation in question is doing this because of their generosity. Or for another reason.
There are so many variables in this equation that there can be no correct answer.
When I made the decision, several financial advisors recommended taking the lump sum and investing. Not surprising. But reality is different. MetLife’s survey shows that “34% of Retirement Plan participants, who took a lump sum, depleted it in 5 years, on average”. https://www.metlife.com/about-us/newsroom/2022/february/retirees-depleting-retirement-plan-lump-sums-faster-than-five-years-ago/
If you focus on managing investments well, lump sum will work out fine. Not everyone can do that.
To better understand that statistic, I’d love to know what the average balance was for the the 34% that depleted their lump sums. Maybe a lot of people in the $25,000 to $50,000 range depleted their accounts, but few over $100,000 did.
That survey was related to defined contribution plans – 401k – so since the mentality was not a pension that’s easily possible. These folks were faced with buying an annuity and saw a pile of money facing them.
I know several people who blew either a 401k or pension lump sum every quickly. One guy I worked with took nearly all his 401k and bought a giant RV.
Good points, Dick.
Wow, that’s quite a statistic — not terribly surprising, but it does highlight the value of taking the monthly pension payments.
I retired in 2007 at age 64 with a large percentage of my assets vested in the company pension plan. I also had a 401k and anticipated income from Social Security. I took a lump sum and never looked back. I invested in mutual funds at T. Rowe Price and maintained 60% in equities most of that time. I made mistakes along the way. Early on, I became skittish and sold when the market took a dive. Years ago, I held AOL stock (a rare venture into stocks rather than funds) and held on far too long. Since then, I’ve stuck to mutual funds and practiced the ‘ol mantra: Buy low, sell high. It works. Along the way, my wife and I withdrew a ton of money. Today, I have the same amount in my portfolio as in 2007. I’ve raised my equities to 70% and plan an increase to 80% when the market drops. What I learned: Invest for the long term, do not panic when the market drops, keep plenty of cash on hand and, most importantly, buy low, sell high. Taking a lump sum isn’t right for some folks but it’s worked for me.
This is a good example of how taking lump sum proved to be the right option. Congratulations!
It depends. I have had this option twice in my career. When I left my first company after 17 years (at 39 years old) I did the calculation and took the lump sum as I could roll it into my IRA and continue the growth. Then when I retired from my second company – now at 55 I ran the numbers with the discount rate/rules at that time and opted to leave that one as a pension. I also paid close attention to the details when I took the lump sum and challenged the interest rate they gave me as it had changed a bit just after I left and submitted my paperwork. It was significant and resulted in almost $10000 of additional funds to my IRA.
Interest rates play a big role in calculation of lump sum. Rising interest rate means reduced lump sum, but monthly payment calculation is not affected.
Hi, this is Chris. We have been in this situation in recent months. The difference was that the two pensions my spouse was eligible for were small. Not enough to live on, but they added up enough to pay our property taxes. At least for now. LOL! The lump sum option was not life changing, but a good amount, and a lot to us. In my research, I came to HD as a trusted source, and read all that was written on the subject. We do have a financial advisor, and he did recommend rolling over. We did not take his advice and decided to take the pensions. In our case, when the advisor ran his software, there was no advantage to rolling over. We start getting the pensions in Aug for both of our lives.
I know some who took lump sum, used part of it for annuity income and invested the rest. That may be a way to mitigate risk.
That might make sense for a larger dollar amount, but we had a smaller amount. When I did the annuity projection, it was less than what we would get in the pensions. Thanks. That might help someone else, though. Chris
I never had the lump sum/payment option, but being a fan of defined benefit pensions I lean towards payments, but your situation may be different. I would offer this word of warning to those working with an advisor: Unless your advisor charges you by the hour, he stands to lose out on a lot of fees if payments are taken. Keep this conflict of interest in mind when deciding what’s best for you.
Agree about financial advisors. In addition, employers will prefer you take the lump sum and go. They can avoid the hassle of managing monthly payments for the rest of your life.
Sundar, I’ve written several articles on this topic. I chose the monthly pension because I thought it made the most sense, especially with an early retirement subsidy available to me. But, as always, the devil is in the details. You need to look carefully at the plan provisions and understand your options. My only regret with the pension is my company froze it 4 years before I retired!
Employers have many options to tweak the deal. In one case, they offered to increase age by 5 years and service by 5 yrs to get people to retire early with a bigger pension. Lot more people left. Probably too many.
My husband retired from his state job in 2016 and took the monthly pension. When I retire from my university job next year, I’ll also take the monthly option instead of a lump sum. We both took/will take the option with full survivor benefits, and both pensions have annual COLAs.
We’re not savvy investors and don’t want things to be complicated as we age. Having the pensions and Social Security will make things easy now and later when there’s just one of us.
The only thing that could change that is if something happened to my husband between now and when I retire. That might cause me to think again about the lump sum, since leaving a pension for him as my survivor wouldn’t be relevant anymore. However, I could name a different survivor (our daughter), though she’d get a lower payout after I’m gone because it’s prorated on her life expectancy.
I never thought about survivor being other than spouse. You have a great point. Something to learn.
I’ve discussed in previous articles that I chose the monthly payment option when I retired in 2023. Almost a year in, I am convinced I made the correct choice by taking the road less traveled. Here are a few reasons:
-The pension currently covers all of our core expenses
-When we start Social Security in a few years, our passive cash flow should be significantly above our spending needs and even more will be available for giving to church, charities and children
-If I die before my wife, money will keep coming in for her each month, and she won’t have to manage a large pension portfolio
-I don’t have think about how much to withdraw from my retirement funds for current expenses, resulting in less psychic burden
But Ken, why not start SS now – assuming you are FRA – and invest it or avoid using retirement funds now?
In this article, I linked to both Jonathan’s Guide and a Wade Pfau research article that–I thought–answers this question. Pfau continues to show through his research that waiting until 70 is the smartest choice for most people to claim Social Security, even it’s not intuitive.
Pfau showed that most folks won’t invest aggressively enough to beat Social Security. Even they did, SS is not subject to market fluctuations. Instead, it’s steady, inflation-adjusted income. Don’t you think that’s more comforting?
In reference to Dick’s reply.
I guess I’m just stubborn because I don’t see it.
The benefit at FRA and 70 are actuarially equivalent – at least for a white male. We saved my and Connie’s FRA age benefit for several years while working and beyond. Those funds – six figures worth now, generate over $1500 in tax free income and growing each month as the interest is reinvested. I can increase my income using that interest if desired or it can serve as added income for my wife plus the asset is still there.
There is something in the age 70 argument that I must be missing.
Dick, I’m a youngster, not even 62 yet. I do expect to take SS before FRA because my wife is older than me and only qualifies for a spousal benefit. Problem is, I really like my encore career. Continuing to have earned income muddies the water a bit when I consider the implications of taking SS early.
Why would Ken claim now when everybody agrees that Social Security is the best annuity available — at least partly tax-free, survivor benefit to the spouse, inflation-indexed and government guaranteed? I think delaying benefits by the main breadwinner makes total sense unless both spouses are in poor health.
Well, not before FRA, but while all you say is true, it would only be a bit less true if payments started at FRA with the added benefit of accumulating assets that would generate more income when needed while having the funds in tact.
A spouse for Ken and me have survivor options, plus SS, life insurance and investments not to mention the added income from the SS benefits invested.
I guess I’m just a bird in the hand kind of guy.
I’m curious about the significance of the FRA designation. Is this a tax issue, where before FRA, SSI is taxed differently? Otherwise, I see a continuity from 62 to 70, in which case “FRA” is an effectively meaningless term. [I Could research this, but asking R Quinn has other benefits.]
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If you claim benefits before your full Social Security retirement age, you could lose benefits if you have earnings above certain thresholds. That stops once you reach FRA.
https://humbledollar.com/money-guide/social-security-eligibility/
A pension, which is widely lamented as disappearing, is an annuity designed to be paid as lifetime or dual lifetime income. When a person retires a pension should be used that way.
Only in the event of an early termination of employment with a vested benefit should the lump sum be considered.
I hear of retirees without a pension agonizing over withdrawal strategies, a pension income stream solves that.
Agree. I may be comfortable managing a complex withdrawal strategy, but my wife is not.
Sundar, your decision to have a passive income stream that allows you to remain fully invested in your (presumably stock-focused) retirement plan has clearly worked well for you. It has enabled you to have your existing “lump sum” nest egg benefit from the forward march of the market.
Some people are faced with a related but different choice—to invest “lump sum” or monthly (often called dollar-cost-averaging). Strictly investment-wise, “putting it all in” is usually superior because the market’s long-term upward trajectory can work on the large initial investment right from the starting gate.
One major pitfall of holding on to a lump-sum all-stock investment, though, is referred to as sequence-of-return risk. A stiff market reversal right before or during retirement can wreak havoc on your withdrawal formula. One advantage of dollar-cost-averaging is the ability to capitalize on market setbacks early in the investment program. While the lump-sum investor suffers the full brunt of an abrupt correction, the monthly payer is scooping up stocks at bargain prices. With his steady monthly allotment, he is also buying more shares when prices are low and fewer when they are high, lowering his average cost-per-share. Investors feeling hesitant about investing in stock funds may also feel more secure wading in slowly.
Dollar cost averaging using monthly payment funds is interesting. I have been doing it, but never thought of it that way.