The $400,000 Question: Monthly Pension or Lump Sum?


June 29, 2016

JER WW PHOTOA client of mine, call him Raymond, recently retired from a long career in the oil and gas industry. He had something many savers of today would envy—a fully-funded, guaranteed pension. These products, once common, are increasingly rare. But if you do have one, you need to be thinking about more than just planning your retirement party. There are critical decisions to make before you retire. In Raymond’s case, he could take his pension as:


  • A monthly payment guaranteed for the rest of his life
  • A (smaller) monthly payment that could continue at some level until his surviving spouse died.
  • A single lump sum payment upon retirement

“How do I compare these options?” Raymond asked.

It required getting into the numbers. Under the first option, Raymond’s monthly pension would pay him $25,000 per year for the rest of his life. On the other hand, if taken as a lump sum he would get $400,000 up front. It’s easy to be tempted by the large figure. But taking the lump sum means figuring out how to make it last through retirement. To get $25,000 per year in returns from $400,000 would require 6.25% distribution every year. Financial products that can return that much are rare, and risky. Raymond and his wife would be using this money for living expenses. So the returns would need to be consistent every year. While some assets, such as stocks, may return better than 6.25% in good years, there are also the inevitable down years to consider. Just think about 2008.

What would be a reasonable, consistent rate of return to plan on, if Raymond took the $400,000? About a 3% rate would be safe. That would give Raymond and his wife about $12,000 per year while preserving the principal. But that simply wasn’t enough for the couple’s expenses, so we eliminated the lump sum option.

Now the question was whether to take the $25,000 per year until Raymond died, or invoke a survivorship option which would extend the payments to a surviving spouse. By taking less per month, payments could be continued at different levels (75%, 50%, etc.) to his wife if Raymond passed away first. Fortunately, he was in excellent health. But his wife was younger by eight years, which inclined Raymond toward the survivorship option.

I laid out the different survivorship scenarios in a spreadsheet. By taking a monthly payment that was 6% less, he could preserve 75% of that payment for his wife after he died. That’s the option he selected. By laying out the couple’s various assets and their budget, we found that the resulting annual payment ($23,500 before taxes) combined with social security would cover the couple’s basic living expenses (food, clothes, medicine, etc.) nicely. A mix of other savings and investment accounts they’d accumulated over the years could then be used for less critical expenses such as travel and entertainment. They would even be able to plan a nice bequest for their daughter.

After working this out, Raymond told me something I have heard from other clients, which was how happy he was to have someone to work through these decisions with, someone who had no conflicting “skin in the game,” just Raymond’s own best interest. An advisor who is compensated based on commissions for products sold, or based on assets under management, might have been biased in favor of the lump sum.

If you would like an unbiased sounding board for your family’s financial questions and concerns, and you want to remove the guesswork from retirement planning, contact PARTNERSINWEALTH. We can put you in control of your finances, your plans for the future and your peace of mind today. To learn more, please contact Jim Waters, CFP®, at 713.964.4028 or