If you have a traditional pension plan, at some point you’ll have to decide whether to take a lump-sum payout or a series of monthly payments.
When facing such a big decision, we’ve found it helpful to identify the key components that can help you break down the decision and make the process a bit more manageable. Here is a short list of a few items that we consider when guiding people.
“Remember that it isn’t about return—it’s about getting to where you want to be when you want to get there!” said Mick Owens, who wrote the popular book Diamond of Life: The Five P’s of Success and Significance.
Life Expectancy:
The timeframe is a key part of your decision on whether to take monthly payments vs. a lump-sum distribution. As difficult as considering life expectancy may be, you’ll have to estimate how long you may live in order to begin the process of placing a value on different payment choices.
For example, how do you evaluate a lump-sum offer $600,000 vs. a payment plan of $3,000 a month? We can show you how to develop an apples-to-apples comparison.
Family First:1,2
How does your family factor into your decision? With a lump sum, for example, you can direct how the money is invested for your future. With monthly payments, on the other hand, you have several choices to consider. Here are some of the common ones:
- Single life payment: Payments are based on your own life. When you die, there are no additional payments to your beneficiaries.
- Single life with term certain: If you die before a specified term is over, your beneficiaries will continue to receive payments for a predetermined period.
- 50% joint and survivor: After you die, your surviving spouse will receive payments that are equal to 50% of the original payment for his or her life.
- 100% joint and survivor: After you die, your surviving spouse will receive payments that are equal to 100% of the original payment for his or her life.
Please note: These are hypothetical choices. Your pension plan may offer different choices.
“…You have plenty of good things laid up for many years. Take life easy; eat, drink, and be merry… You fool! This very night your life will be demanded. This is how it will be with anyone who stores up things for himself but is not rich toward God,” Luke 12:19-21
Other Considerations
Can you get both? Is it possible to get a portion of your payout as a lump-sum and a portion in monthly payments? That may help if you’re looking to address some immediate financial needs, as well as prepare for the future.
What’s your risk profile? Are you more comfortable getting a monthly payment? Or would a lump sum allow you to address other investment needs?
What about inflation? Does your monthly payment include a cost-of-living adjustment? If not, your payment may lose purchasing power over time. A lump-sum payment could be structured to address your concerns about inflation.
What are the tax considerations? Monthly payments and a lump-sum payment will both be taxed but in different ways. With a lump sum, you may also have the choice of moving the money into a retirement account that continues to defer taxes.
Remember, we’re not tax experts but we are associated with companies that are. We would encourage you to have one of our tax professionals or your own tax professional review your pension offers so they can address your specific tax concerns.
Your pension payout may be one of the biggest financial decisions you will ever make. We would urge you to draw on all your resources during the decision process so you can feel more comfortable with your choices.
- Schwab.com, October 16, 2023
- Fidelity.com, 2025
