You're Offered A Lump Sum Instead Of A Monthly Pension: Should You Take It?

The letter arrives unexpectedly in the mail, tucked among bills and junk mail, and many people are likely intrigued.

A former employer has a proposition. The letter's recipient is vested in a pension at their former workplace, and that pension is still on track to be paid every month for life once they reach a certain age.

The employer has an offer: The person can take a one-time lump-sum amount now instead of future monthly pension payments. The window for making a decision comes with a deadline, so don't wait too long to decide, the letter says.

For the former employer, this is a chance to reduce some long-term risk and limit how much future pension payments to employees might affect the company's financial performance.

But if you're the one receiving the letter, you might need to puzzle over the math, trying to figure out how the numbers will work best for you.

• Is it wiser to stick with the plan you had — drawing a pension when the time arrives?
• Is the lump sum an opportunity to build an even better retirement?

People still working for an employer that offers a 401(k), a pension or both face similar questions as they gear up for retirement. What are the best options for them, and are there ways they can act before retirement to get the most out of their money?

For example, if their plan allows it, should they roll their 401(k) money into an IRA before they retire, to protect their assets and perhaps have more investment options? If they do, should they also take their pension as a lump sum and use that to replenish the 401(k) account?

Are there other strategies they can put into play?

To reject or not

There are things to mull over here.

One reason to decline a lump sum could be that you expect a long life — much longer than the average — and the pension is guaranteed, regardless of how long you live.

Holding on to that pension promise might feel less risky than taking the lump sum and investing it on your own.

In contrast, a reason for taking the lump sum could be that doing so will give you more control of the money as you explore the options for investing it and how that might fit in with your other investments.

Perhaps you have other retirement savings, and the lump sum would give you an opportunity to leave more of a legacy for your children.

The questions are many, and the answers aren't sitting on a one-size-fits-all shelf waiting for you to put them to use.

This is, without a doubt, a complex decision that requires careful thought.

A case study

All that said, though, in many cases, I find it's best to take the lump sum, seizing control of your future and putting the money to the best use for you.

In my experience, you can use that lump sum to purchase an annuity that will match the monthly pension payment and still have money left to invest in other ways.

Rolling over a current 401(k) into an IRA can also be a wise move in many instances. I've seen that play out in real life, and here is one example: Sometime back, a client still working at the business where she has a pension and a 401(k) came to me to review her options and try to determine the best way forward.

In her case, the numbers were sizable, which made the decision even more consequential. The monthly pension she had earned would pay her $5,855 a month for life or $4,808 monthly if she chose an option that allowed her spouse to continue to receive the pension after her death.

After evaluating the numbers and the possibilities, we came up with a plan.

We decided to roll over her 401(k) money, and when she retires, we will replenish the account we moved with the lump-sum money from her pension.

We could arrange for her to buy an annuity that would pay her the same $4,808 as the spousal option. She'll have the same amount of income that the pension would provide, but with a larger amount of invested assets.

If necessary, seek assistance

If you receive a letter offering a lump-sum option on your pension — or you're nearing retirement and wondering about the proactive steps you could take —review the numbers carefully and see how they line up with your personal situation and goals.

Usually, you get only one chance to make a decision on this, and you want to make the right one for you.

It's understandable if you find the options confusing and overwhelming. Plenty of other people are just as confused.

If you work with a financial professional, bring them into your decision-making process. They can help you review the numbers and decide on a strategy that's best for your situation.

Maybe that's keeping those pension payments in place. Maybe it's using the lump sum to buy an annuity. Maybe it's taking the lump sum and investing it in some other manner.

Ultimately, it's your money and your decision. But with thoughtful consideration, you can arrive at the right choice and feel satisfied that you did all you could to try to give yourself a more secure future.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.