Pension: lump sum vs annuity decision

Lump sum or annuity — what HR isn't optimizing for

When a company offers you both options at retirement, they've already done the actuarial math. The lump sum is calibrated to be slightly favorable to them — they're shifting longevity + investment risk to you. Whether you should take it depends on three things they don't know: your discount rate, your real life expectancy, and your cash-flow needs.

The three breakevens

• Discount rate breakeven — at what return assumption does annuity PV equal lump sum?
• Longevity breakeven — at what age has the annuity paid out the lump sum nominally?
• Sequence-risk breakeven — at what equity-return drawdown does the lump sum lose vs the protected annuity?

When lump sum usually wins

• You expect to live ≤ 5 years past life expectancy (health condition, family history)
• You can earn >7% on the lump sum (or have higher-return investments)
• You want estate value (annuity dies with you; lump sum passes to heirs)
• You're confident you won't blow it (50%+ of lump-sum recipients deplete it within 10 years per Stanford study)

When annuity wins

• Long life expectancy (often 85+)
• No surviving spouse / no estate goals
• High likelihood of being a poor self-investor
• Need stable income to avoid running out
• Pension is from a well-funded sponsor (not bankruptcy-risk)

What this calc misses

• Pension Benefit Guaranty Corporation (PBGC) protection caps annuity coverage if employer goes bankrupt
• Tax timing: lump sum can be rolled into IRA pre-tax, then drawn down tax-managed
• Joint-and-survivor options (50%/75%/100% to spouse) reduce monthly payment