How to read the result
The key number is the return needed to match. It is the yearly investment return the lump sum must earn so you can pay yourself the same monthly amount until the age you chose. If that number is low, say 3% or less, the lump sum is a fair or generous offer. If it is 6% or more, you would need strong markets just to break even, and the monthly pension is likely the better deal.
The second number shows how long the money would last if you paid yourself the pension amount and earned the return you set. If it runs out before your planning age, the monthly pension protects you better.
Reasons people choose the monthly pension
A monthly pension is paid for life, however long that is. It does not depend on the stock market, and it is hard to spend too fast. Most private pensions are insured by the Pension Benefit Guaranty Corporation up to a yearly limit. For people who worry about running out of money, a steady check is worth a lot.
Reasons people choose the lump sum
A lump sum is yours to control. You can invest it, leave what is left to your children, or use it for a large expense. If your health is poor, a lump sum can be worth more than payments you may not live to collect. Some people also prefer to take the money while the company is healthy.
Things to check before you decide
Look at the survivor option. A joint pension keeps paying your spouse after you die, and that can be worth far more than the single-life figure. Check whether the lump sum can be rolled straight into an IRA to avoid a big tax bill. And remember that a lump sum must cover health costs and surprises too, so be honest about how well you would manage a large balance for 25 years or more.
Questions
Should I take a pension lump sum or monthly payments?
Monthly payments protect you from outliving your money and from bad markets. A lump sum gives you control, flexibility and something to leave to your family. If the lump sum would have to earn an unrealistically high return to match the monthly payments, the monthly option is usually the better deal.
How is a pension lump sum calculated?
Your employer turns the future monthly payments into one amount today using interest rates and life expectancy tables set by the IRS. When interest rates are higher, lump sums are smaller, and when rates fall, lump sums grow.
Is a pension lump sum taxed?
If you roll it directly into an IRA, you owe no tax until you take money out. If you take it as cash, the whole amount is taxable that year, and taking it before 55 or 59½ can add a 10% penalty.
What happens to my monthly pension if the company fails?
Most private pensions are insured by the Pension Benefit Guaranty Corporation, a federal agency. It pays benefits up to a yearly limit if a plan cannot. Public pensions for teachers and government workers are backed by states and cities instead.