During a 2020 sales slump, Honda offered early retirement to some of its U.S. workers 55 and older. Those who accepted were given a choice: Either stay with the pension they’d earned — meaning they’d receive monthly payments for the rest of their lives — or walk away with a single, large payment calculated to be a fair approximation of such a pension. Many employees jumped at the prospect of taking a pile of cash, says Tom McCarthy, a financial adviser in Marysville, Ohio. “We saw a flood of associates opting to retire.”
The pension-versus-lump-sum decision leaves retirees with a conundrum: Who should manage your pension money, your old employer or you? It’s a potentially life-changing decision, says Ric Edelman, a Fairfax, Virginia, financial adviser and founder of Edelman Financial Engines. It’s also one often made hastily, as employees are frequently not given much time to decide, and many don’t have objective financial advice readily available. Once made, the decision is typically irrevocable.
And the right choice may not be obvious. If you take a lump sum — available to about a quarter of private-industry employees covered by a pension — you run the risk of running out of money during retirement. But if you choose monthly payments and you die unexpectedly early, you and your heirs will have received far less than the lump-sum alternative. “Two people in very similar situations may opt for different outcomes,” Edelman says.
Getting to yes or no
Deciding whether a lump sum or a pension will turn out to be the better value for you personally is a complicated math problem with variables you can’t predict — chiefly, how long you’ll live (and how long your spouse will live, if you’re married), and the money you might earn by investing a lump sum. Your employer should explain how its offer was calculated. If you question the assumptions, an online calculator can estimate the investment returns you would need on your lump sum to match the value of the pension.
But such a calculator can’t take into account an uncertainty like the devastating risk of a collapsing stock market soon after you retire. “It doesn’t make sense to plug in a couple of numbers and make a critical life decision [based] on it,” says Ron Guay, a financial adviser with Garrett Investment Advisors in Sunnyvale, California.