Pension: Lump Sum vs Monthly Payments (Guaranteed) - Here’s How To Determine Which Is Better For You

[@toddmaniatoddmania9844]

I took a lump sum from my former employer in 2014, and haven’t looked back. I’ve already quadrupled my money.

[@bruce12393]

Great explanation! This is what I was looking for these past months. Helps puts my pension options into perspective.

[@earlyretirementari]

Perfect! Glad it helped

[@TimCristy]

My pension was terminated this year and I chose to roll the lump into my 401k. Part of it for me was it was the easiest option (pension to 401k the company handled the direct electronic transfer and it was immediately invested based on my current 401k allocation). Plus, I wouldn't have to deal with whatever insurance company would take over future annuities. I've got 4 years until planned retirement so it will have a chance to grow until then.

[@Knglugonn1]

I'm confused. Did you confuse the cumulative withdrawal from the lump sum option with the remaining balance of the lump sum? You kept saying that the values in that column were what you could leave to your heirs if you died at that point. But, I think that's just his much you would have withdrawn, not the remaining balance.

[@joemyers]

What you'd leave to your heirs would be lump sum * 1.03, and mulitple 1.03 each year thereafter of that new amount. Does that make sense. I added a column in my spreadsheet that showed the lump sum growing 3% each year. 3% is what he used in his example if you looked at his formula. ...so $489,011 in his example would go to heirs. Did I get that right?

[@kaytee1617]

Thank you for this insight. Very helpful.

[@joemyers]

With a decision of $289,947.16 lump sum or monthly pension of $3670.29. It seems like the pension is the way to go? ... but if doing the pension, you'd miss the opportunity to leave $792,108.18 of lump sum growth to your heirs if you lived 35 more years using your example. So I guess the next question is how much would you need to invest each month from the higher pension payout to leave $792k to your heirs = $623.25 @ 5.5% growth. Take the pension and have the best of both worlds in this case, higher pension and build some networth to pass to heirs! Thanks for the help Ari!!!🤓

[@stanm2.0]

Ari, another great piece of content. In the lump sum pay out example section with the 5.5% withdrawal amount, what was the assumption of the annualized rate of return on the $179K. Thank you for the insight.

[@MatrixMatched]

Thank you, Ari. I will do the math. I have a tiny pension from a former position. It also gets split in half because of a QDRO.

[@ducheau100]

I think its good to have asset diversification. A pension, IRA, 401K and roth is a good mix and hedges against market fluctuation. I do not plan on taking lump sum unless I have severe medical problems.

[@svalder85]

I agree with your math. But there are other considerations besides what gives the most dollars. What about risk. Risk that I screw up (we will all have diminished abilities at some point), that I am a victim of fraud, that I give too much to my kids too soon.... Or that I pass on, but my wife doesn't handle investments well? There are real benefits to getting a check every month.

[@williamrogers1219]

The problem with the analysis is it assumes a linear rate of return on the $179k, but markets don't provide those returns (i.e., sequence of returns risk). It also excludes poor investor choices such as chasing returns and fees to manage the lump sum.

[@damienbates]

Yep! And if you depend on it for paying the bills it’s not guaranteed. The markets can screw you and you’ll run out of money.

[@anthonybrown7200]

@@williamrogers1219 would not the sequence of returns be mitigated by the 4% rule? Understanding that withdrawal rate is not perfect and should be adjusted accordingly. I agree there it's not a calculation for poor investor choices which would include buying a 300,000 RV or moving to Georgia/ Tennessee to buy 150 acres of unmanageable land in your late sixties because you think you will be walking around in the woods the rest of your life. I believe it is important to work with a professional even if you are studied.

[@VD-USA21]

Great, easier to duplicate explanation.

[@MidlifeCrisisManagement]

thanks for the analysis, Ari. the vast majority of colleagues that have retired from my employer have elected the lump sum option. it requires you to have a traditional IRA and the funds are sent there. there's no other way they'll distribute the funds, so nobody is at risk of triggering a taxable event.

[@earlyretirementari]

Of coirse

[@cherryjohnson513]

Some “pension” schemes get a yearly COLA. Also some pension models (like CalPERS) has a total Account Balance and the monthly pension is taken out of that balance and if the pensioner outlives the balance the pension agency continues to provide the monthly pension. If the pensioner passes away before the account balance is used up, the pensioner’s estate receives the remaining balance. (This scenario is assuming the pensioner did not sign up for 100% pass on to a beneficiary spouse.)

[@alexgrabovetsky4849]

One more reason for a lump sum if the company changes its pension plan or cancel it in the furute you get your $ out.

[@damienbates]

It’s protected by a national insurance plan. If the company goes out of business, you’re covered and still get paid.

[@BuffaloEskate]

How do you minimize taxes on the money?

[@TomcatSTL]

What a Great Podcast! Thank you, Ari!

[@earlyretirementari]

You’re welcome!

[@davidgold6407]

My sense is that if you have a defined-benefit/old fashioned pension (i.e. $/month is function of salary and years of service) then take the pension. If you earned your pension in a "cash balance" type account, then take the "cash" and move to rollover-IRA.

[@Charles.P17896]

Thanks, I learned a new Excel formula!

[@MrGoodaches]

I’m not challenging, simply interested in knowing your basis for using 5.5% as “sustainable withdrawal rate”. I understand that 4% is considered protecting for worst case scenario. And that Ramsey’s 8% is based upon unrealistic returns and a failure to understand sequence of returns risk. So 5.5% being somewhere in between doesn’t seem unreasonable. But there are also other rates somewhere in between - that’s why I’m wanting to absorb whatever theory or rationale makes 5.5% the figure you use for sustainable withdrawal rate. Thank you.

[@anthonybrown7200]

Scary when it's your life's work.

[@tinanicole4]

Exactly Anthony!

[@scottbaker9066]

The pension (Annuity) to lump sum ratio is the interest rate as if it is the interest on a money market account. As you know, over the past several decades equities (stocks) have far exceeded money market returns. I advocate for taking the lump sum and investing 30% in each of the S&P500 (VOO), the NASDAQ (QQQ), and a crazy money account like TQQQ BitCoin or Gold (I like TQQQ)

[@cxr1544]

Ari great videos. Have you done any videos on health care costs and taxes for retirees spending levels? i would love to work with you but you made a comment on a video a day or two 2million 401K you cannot add any value. Is that true for someone still looking for piece of mind thanks

[@earlyretirementari]

Thank you. I have TONS on healthcare! Just check out my channel. I recommend starting with the academy: ari-taublieb.mykajabi.com/early-retirement-academy

[@deanostera3629]

Retiring December, January time frame. Waiting on lump sum to be raised once the new interest rates are set. I work for AT&T, and can't get a straight answer on when. I think it changes for the next year in December.

[@BardWannabe]

In my state (Illinois) they make the analysis harder on state employees by saying you get healthcare coverage if you take the annuity but not the lump sum. This is true and potentially helpful if you retire early. But on further research you find that once you reach medicare age, they are only covering part D and a few dollars for C (you still have to pay B). This seems pretty scammy to me. So the value of the annuity option decreases with each year you don’t retire early.

[@anthonybrown7200]

How would you compare Florida state pension with a 1.5 cola and a DROP option with a the lump sum payout. Also with the investment option would have to go self-direct in order to get respectable returns because Florida investment option offers few funds in which to invest. Thank you for any insight

[@joemyers]

Shouldn't your model include taking a sizable chunk from the lumpsum to pay for the tax hit that comes with it?

[@dantheman6607]

I took the annuity I already had a lump sum called a 401k 😂

[@Bondbeer]

Interesting as I took the lump sum because I already have another annuity (social security). H

[@Kevin-jf5bw]

the pension decision was a lot easier in a zirp world. my lump sum value declined even while i continued to work the past several years. i sense i should have retired in 2021. i had planned to take the lump sum. now facing such a large pension drop not sure what to do. my annuity payout calculation is 7.3% and i have a cola of a flat 1% every year beginning at age 66. anyone in a similar predicament?

[@danielpinzow3900]

Take the annuity except for two scenarios-you are in poor health or your lump sum is extremely large and can be reinvested into an amount higher than the expected amount you’d get from the annuity over your lifetime

[@SarahStuff-p5u]

Pension is taxable, Ira stays untaxed, and if you have wiggle room to slide it to a Roth, it generates income your whole life tax free.

[@courtneyrebecca4health573]

So if you are 55 yo currently receiving a Pension from previous employer and you have to withdraw your 401k bc you can no longer contribute to it, what would be the most beneficial way to take the money out and have that money continue to make money? In a Fixed Indexed Annuity, specifically Allianz Benefit Control Annuity the best option? Seeking for other options to avoid being taxed on that money but have it continue to grow? Thanks for response in advance...and I couldn't find the code for the program.

[@earlyretirementari]

Code is OPTIMIZE20. I don’t like annuities. Video coming out on why in a few weeks!