Should I Take a $78,000 Lump Sum or $650 Monthly Annuity Payments?

When debating between a lump sum pension payout and monthly annuity payments, your decision will depend on your individual circumstances. Key factors include life expectancy, income sources and how soon you will receive the lump sum.

Generally speaking, a longer life expectancy makes the annuity a better choice. However, if you have the option to receive the lump sum early, this may be more favorable. Expectations for inflation and investment returns can also influence this decision.

The lump-sum option, while typically riskier, also offers greater upside potential. However, this all depends on market performance and your investment management skills. Those who are risk-averse or aren’t confident investing a lump sum may opt for the reliability of guaranteed annuity payments.

Speak with a financial advisor before making significant decisions about your retirement savings.

Lump Sum vs. Annuity

Offered by employers, pension plans pay a guaranteed monthly stipend from the time you retire until your death ¹ . These payments are guaranteed by the employer and the Pension Benefit Guarantee Corporation (PBGC).

Many plans provide spousal benefits that will continue payments to a partner in the event of the pension holder’s death. Some also offer inflation protection in the form of payments thatreflect the cost of living.

Employers frequently allow covered employees to choose a lump sum instead of steady, smaller monthly payments for life. Someone who opts to receive the lump sum will receive no further payments from the pension. Instead, it is up to the employee to invest or manage the lump sum themselves.

If investment performance is good, this can result in a greater overall financial benefit than the annuity option. However, if you makes poor investment decisions or the market performs poorly, the lump-sum option could be less advantageous.

Generally speaking, a lump sum can be a good option for someone in poor health with a short life expectancy. It may also make sense for someone without a spouse or other income to pay retirement expenses. Plans that lack features such as spousal payments and inflation protection can also reduce the value of an annuity.

However, when you will receive the lump sum is a key consideration. Some companies will pay a lump sum years before the usual retirement age. If this happens, you can invest the the lump sum sooner, giving it more time to benefit from compound interest. In the end, this option could result in more money than the sum of all annuity payments.

However, there are a number of caveats for this choice. Taxes may be due immediately on a lump sum unless rolled over into a traditional IRA within 60 days of distribution ² . You must also take investment fees into account. These can affect the performance of an investment portfolio funded by a lump sum.

If you need help deciding between a lump sum or annuity, consider talking it over with a financial advisor.

How to Think About the Decision

Say you are deciding whether to take a $78,000 lump sum or receive $650 monthly annuity payments. Your current age and life expectancy are key considerations in this decision.

For example, assume you are 60 now and expect to live until 80. You will start receiving your benefits when you retire at age 65. That means you’ll receive 180 payments of $650 for a total value of $117,000. If you live until 90, the cumulative value of the annuity payments bumps up to $195,000.

If the plan includes a spousal benefit or inflation protection, it can be worth much more. For instance, with a 2.5% annual inflation adjustment and 100% spousal benefit for a 55-year-old spouse who will live to 85, the annuity payments would total over $266,000.

Now, say you take the $78,000 lump sum. You can receive the money at age 60 and put it into investments. If you live to age 80, your investments would only need to grow at 3.39% per year to equal the $117,000 value of the annuity. This includes no spousal benefits or inflation adjustments. To match the annuity’s value with inflation adjustment and spousal benefits, your investments would have to earn 7.56% each year.

Keep in mind the fact that the decision to take a lump sum is hard to undo. Once your employer pays, it has no further financial obligation. It’s possible to later use the money received from a lump sum to buy an annuity. However, the associated fees will likely result in smaller monthly payouts than the original annuity benefits.

How an Advisor Can Help You Decide Between a Lump Sum and Monthly Annuity Payments

The first thing a financial advisor will calculate is your breakeven age. This is the point at which cumulative $650 monthly payments surpass the lump sum in total value.

If the lump sum is $100,000, for example, you would need to collect payments for roughly 154 months, or about 13 years, before the annuity produces more total income. This number offers a concrete reference point when evaluating whether your life expectancy and health make the monthly payment the stronger choice.

Inflation

Inflation can eat into the purchasing power of a fixed $650 payment over time. A dollar amount today may cover significantly less in 15 or 20 years, depending on inflation rates.

A financial advisor can calculate what $650 per month will actually be worth in real terms at various points in the future. They will compare that against what a lump sum invested in a diversified portfolio may generate over the same period. They will also account for both growth and inflation.

Return on Investment

If you take the lump sum, what you do with it matters enormously. A financial advisor can model the projected income a lump sum would generate if invested conservatively in bonds or dividend-paying assets versus a more growth-oriented allocation.

For someone who can reliably invest the lump sum and maintain a disciplined withdrawal strategy, the lump sum may outperform $650 monthly over a long retirement. If you are likely to spend it down quickly or invest it poorly, the guaranteed monthly payment may be the safer path.

Taxes

Tax treatment differs between the two options and affects the real value of each choice. A lump sum may be taxable in the year it is received ³ . This can potentially push you into a higher bracket and triggering increased Medicare premiums. Monthly annuity payments spread that tax liability over many years, keeping annual taxable income lower.

A financial advisor working alongside a tax professional can model the after-tax value of both options. This is especially critical since the gross figures alone can be misleading.

Income Sources

Your retirement income sources play a significant role in which option makes the most sense. If Social Security and a pension already cover your monthly expenses comfortably, the guaranteed income of $650 monthly adds less marginal value. The lump sum may offer more flexibility and growth potential. However, if your monthly income falls short of basic expenses, $650 in guaranteed payments may be preferable to an equivalent lump sum that depends on investment performance to generate income.

Liquidity

Liquidity is a practical consideration that a lump sum provides and monthly payments do not. Large unexpected expenses, including home repairs, medical bills, or family needs, are easier to handle when you have accessible capital.

A financial advisor can assess whether your existing liquid assets are sufficient to cover those contingencies. They can also determine whether the absence of liquidity creates a risk that outweighs the security of guaranteed income.

Bottom Line

When deciding between a lump sum or pension annuity, consider your current age, expected lifespan and when you will receive the lump sum. If you expect to live longer, it can mean the annuity is more valuable. The sooner you receive the lump sum, the more valuable that option may be.

Bear in mind that accepting a lump sum payment means the company has no further financial obligation to you. You’ll be responsible for investing the money to generate an adequate return. However, if you stick with the annuity option, on the other hand, the company bears the burden of ensuring that you’ll receive monthly payments for life.

Financial Planning Tips

• A financial advisor can potentially help you manage your annuities and other streams of income in retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Whenever you are doing long-term financial projections, inflation is an important consideration. SmartAsset’s inflation calculator can help you see how the buying power of a dollar changes over time due to inflation.

Photo credit: ©iStock.com/Vadym Pastukh, ©iStock.com/Jacob Wackerhausen, ©iStock.com/FG Trade