I've become fully vested in my company's pension plan, and I intend to quit in the near future to pursue other career options. It seems the pension scheme allows me to decide what to do with the pension when I quit rather than forcing me to wait until retirement. I'll be 28 when I quit.

Based on what I've read, it seems the lump sum is the best choice considering my age. Most annuities (and I think my options are included) don't keep up with inflation in the long run. This is fine for older people anticipating a short run, but it would be a problem for me.

Am I right in thinking the lump sum is the best option for me?


  • I also have $80k in a 401(k). That's separate from the pension.
  • With a lump sum I'd shore up my emergency stash and reinvest the rest.
  • The lump sum is about $10k; the annuity would be about $500/mo at age 65.
  • 1
    You’ve already mentioned the standard advice regarding this, but without some numbers we can’t analyze your specific situation. Would you care to fill in some details about your pension plan and what it is that they are offering you now?
    – Ben Miller
    Commented Apr 27, 2018 at 18:05
  • 2
    You have to look at the rate of return of the annuity compared to the lump sum, meaning if you invest the lump sum today, what rate of return would the annuity payment be equivalent to? Only then can you determine which is better for you.
    – D Stanley
    Commented Apr 27, 2018 at 18:20
  • Are you saying you have $80k in a 401(k) and a pension? What is the lump sum amount and what is the amount of the annuity payments?
    – D Stanley
    Commented Apr 27, 2018 at 18:22

3 Answers 3


Using Excel's IRR function and the following cashflows:

  • 10,000 today (age 28)
  • -6,000 annually from age 65 to age 85 (life expectancy)

Gives me an IRR of about 5.6% (which means that the 10,000 grows at 5.6% per year for 37 years and needs to continues to grow at that rate to last another 20 years). Which isn't terrible, but with a 40-year investment horizon you can afford to take more risk than that. Plus, since you have a good use for the money today (building an emergency fund) you are probably better off taking the lump sum, building your emergency fund, and putting the rest in a retirement account.

Plus, if you die earlier, you risk getting a lower return (assuming the pension is not inheritable) and your heirs getting nothing at all. An IRA, on the other hand, can be inherited.

  • 2
    This would be a better answer if it at least mentioned the tax impact on the IRR figure you came up with. We might need more information from the OP about this particular pension, but, typically pension lum-sums are immediately taxable unless rolled into an IRA, and even if that's done, there will be tax upon withdrawal too, affecting returns.
    – Beanluc
    Commented Apr 27, 2018 at 21:09
  • @Beanluc That's a good point, but I'm not a tax expert to know the rules for pensions. If you have a different opinion after including tax consequences, I would add that as an additional answer.
    – D Stanley
    Commented Apr 27, 2018 at 21:31
  • 1
    @Beanluc That said, if I reduce the payout by 25% to account for tax (or present value of future tax) I get an IRR of 6.3%, which wouldn't change my answer.
    – D Stanley
    Commented Apr 27, 2018 at 21:34

You could look at it in terms of break even. The annuity pays for itself in 20 months (after you retire) and everything after that is profit. However, that is over-simplifying things somewhat. We all know that a chunk of money today is worth more than the same amount tomorrow, because of inflation and opportunity cost.

If you were to take the lump sum now and invest it in equities, the general guess given these days is to expect an average growth of 10% annually (before adjusting for inflation). So compounded for 37 years, your initial investment might be worth somewhere in the region of $340,000 by the time you're 65. If you converted it all to low-risk investments at that point, it would then take about 84 years of $500/month withdrawals to deplete the balance.

So, if you expect to live past 149, and you don't need the money now and/or don't have something better to invest it in, the annuity might be considered better value. On the other hand, if you have the lump sum, you're not just getting the retirement security, but you also have the opportunity to use it for something else at any point between now and retirement (at the expense of future financial security of course).

Lastly, if you take the lump sum and die before reaching 65, your estate gets that asset at whatever its present value is. The annuity would immediately become worthless, unless it has some clause that lets a beneficiary inherit it (these versions typically cost more or payout less).

  • Why are you inflation adjusting? The future monthly payment won’t adjust with inflation. You should use 10%, and acknowledge that an annuity means your principal is gone. A 6% annuity isn’t a true 6% return. (Or whatever the annuity payout is) Commented Apr 27, 2018 at 19:32
  • 1
    @JoeTaxpayer I assumed the $500/month was inflation adjusted as well (backwards) and that you'd actually get significantly more than that. Otherwise the annuity is a really terrible offer - you'd have to live to 150 for it to be worth it. A 20 year breakeven seems much more reasonable, so that was the basis of my assumption. I've updated the numbers in my answer to not adjust for inflation.
    – CactusCake
    Commented Apr 27, 2018 at 19:52

You can eat your cake and have it too. The 401(k) money (or part of it) can be rolled over into an IRA and can be invested inside the IRA. Whatever you don't roll over and take as a lump sum is taxable income, and most likely subject to a penalty for premature distribution. I believe that 20% withholding is mandatory and so whatever is left can be used to shore up your emergency stash, and/or can be reinvested as you see fit.

  • 4
    I'm asking what to do with the pension, not the 401(k). I mention the 401(k) so you know I have one and am already saving for retirement.
    – ricksmt
    Commented Apr 27, 2018 at 17:37
  • A pension plan and a 401(k) plan are an unusual combination these days; most companies have converted (or replaced) their pension plans with 401(k) plans. But, what I have said is typically applicable to pension plans also; you can roll over the money in a pension plan to an IRA. However, if your pension plan does not allow for rollovers, then, since at age 28, you are not likely to have a lot of money in the pension plan, take the lump sum distribution and pay the tax and premature distribution hit (might be waived since you are taking a distribution as a result of leaving employment). Commented Apr 27, 2018 at 17:58
  • 1
    @ricksmt: Unless the rules have changed in the last decade or so, you can move that lump-sum pension buyout directly into an IRA, without tax. I did it when a long-ago employer was bought out by another company and offered the lump sum as one of the options. (Was rather a nice surprise, as I hadn't even realized I was eligible for a pension from them :-))
    – jamesqf
    Commented Apr 27, 2018 at 17:59

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .