For many American workers, a traditional pension is an artifact that has gone the way of phone booths and percolator coffee. Still, millions of workers are eligible for a pension in retirement.
If you’re among them, getting the most out of your pension requires making several important decisions—most of them irrevocable—that could affect your financial security.
Many private employers give workers who are eligible for a pension two options: a lump sum or a lifetime annuity payout. Besides determining which option will deliver the most income, you’ll want to consider the health of your pension plan, how long you think you’ll live, the other assets you have in your portfolio and your risk tolerance.
Start by assessing the likelihood that your pension will be around as long as you will. Most private-sector pension plans are insured by the federal Pension Benefit Guaranty Corp. (PBGC), so if your employer files for bankruptcy and demonstrates that it can’t meet its pension obligations, its liabilities will be transferred to the PBGC.
If that happens, your pension won’t disappear, but it could be reduced. In 2024, the maximum payout is $85,296 a year, or $7,108 a month, for a 65-year-old retiree.
Even if your employer doesn’t file for bankruptcy, it may decide to off-load the plan by purchasing annuity contracts from a third party—usually an insurance company—that will assume the responsibility of providing benefits to plan participants.
Once your pension is transferred to a third party, it’s no longer backed by the PBGC, although insurance companies are subject to state regulations. Some recent pension risk transfers have raised concerns among eligible employees, who say their employers failed to comply with a federal requirement that companies seek out the safest available annuity.
Taking a lump sum eliminates the risk that your former employer or third-party provider will be unable to meet its obligations, but there are trade-offs. You’ll have to decide how to invest the money and calculate how much you can withdraw each year so your savings will last as long as you do.
In addition, the amount your employer offers as a lump sum may be worth much less than the value of a monthly payment. “In the vast majority of cases, the annuity is worth a lot more than the lump sum,” says Norman Stein, senior policy counsel for the Pension Rights Center.
You can gauge the value of your lump sum by comparing it to the payout you would get from an annuity purchased on the open market. If your pension will pay out a higher monthly amount, taking the annuity is probably the better option.
Also, your lump-sum offer should include a section entitled “The Relative Value of Pension Payments” that compares the value of the lump sum against the value of the monthly payouts, says Jaime Quiñones, a certified financial planner in Marlboro, New Jersey. “You’ll be surprised how often this figure represents a number significantly less than 100 percent of the normal pension payment amount,” he says.
“We tend to default toward annuitizing the pension with a joint-and-survivor benefit because the wholesale pension stream is almost always better than you could do if you took a lump sum and bought an annuity yourself,” says Rick Brooks, a certified financial planner in Solana Beach, California.
