Should You Take Your Pension in One Lump Sum?

If you keep your monthly company pension, you (and your spouse) are guaranteed a fixed dollar payment for life, no matter how long you live. The payment will not keep up with inflation, so it will gradually lose purchasing power. When you die, there will be no equity from the plan to pass on to your kids. However, you can count on — and budget for — a regular check every month. Your kids might inherit the house or other equity.

You should lean toward choosing the pension if you don't have much in savings and depend on the pension plus Social Security to pay your bills. You cannot risk running out of money. If you took the lump sum and your investments went badly — or you lived too long — you'd be in a terrible hole.

Also lean toward the pension if you're in good health and need the highest possible amount of monthly cash from your retirement money. Remember: The lump-sum option is designed to provide you with a pension-equivalent income over your expected lifetime, not your actual lifetime. In our example, Tom's expected lifetime is 86. But he might want to plan for a lifetime lasting into his late 90s. To achieve that, he'd have to withdraw a smaller monthly amount from his investments than his pension would have paid.

Finally, lean toward the pension if you're highly dependent on this money and don't know much about investing. Managing money to last for life entails a lot of risk. If you or your adviser do poorly in the market, you'll also be poorer in older age.

On the other hand, the lump sum might turn out to be a terrific deal — especially for people with substantial savings or other sources of income. LaBrecque says that some of his clients get new jobs after they retire. Or their spouses might be working, or might be collecting pensions of their own.

If you can live on that income plus Social Security, the lump sum is a windfall. You can invest it for growth, to provide yourself with much more money in your older age. It also helps you meet any sudden, large expenses. When you die, you can leave a larger estate to your kids.

What about people in poor health who think they don't have a lot of years to live? In general, you'd take the lump sum. But think carefully about this choice, if you have a joint-and-survivor pension for your spouse. The pension covers your spouse for life. You'd want to feel sure that the lump sum can be invested to do the same.

If you're ready to retire, and your company doesn't offer pensions, you can buy one for yourself. After rolling your 401(k) or other retirement money into an IRA, you could use part of the money to buy an immediate-pay annuity.

That gives you a pension for life (to find the best buy, check this website). Invest the rest in mutual funds for growth. You might even keep the growth portion of your money in your 401(k), if the company allows it.

Think about this decision the way you would if you were choosing between a company pension and a lump sum. Your objective — always — is stretching out your assets so they'll last for life.

Jane Bryant Quinn, a personal finance expert, wrote Making the Most of Your Money NOW.

Also of interest: Try our Fixed Annuity Calculator.