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A Tale of Two Pension Funds

By: Alex Snyder, CFP®, Financial Planner

In March 2023, there were an estimated 27.5 million Americans participating in pension plans1. As these individuals approach retirement, they are confronted with a pivotal decision: whether to opt for a lump sum payment or opt for a monthly payment from their employer funded pension. While this choice may seem relatively straightforward, it entails several qualitative and quantitative decisions to consider. Understanding the financial, physical, and psychological factors involved in this decision is paramount to making informed decisions tailored to each individual’s unique circumstances.

Definitions are below to help understand the lump sum versus pension decision:

  • A pension is a series of payments to retired employees, invested and managed by an employer. It is an income stream, rather than an investment asset.
  • A lump sum is a one-time payment that can be invested or used according to the individual’s goals and risk tolerance.
  • A survivorship option on a pension is an option that allows for pension income to be paid to a beneficiary, typically a surviving spouse after the pensioner’s death.

Both options have their advantages and disadvantages, but these are highly dependent on an individual’s circumstances. Below, some relevant factors are discussed on why someone may want a lump sum or a structured pension payment.

Individual Factors

1. Health Considerations:

Health, particularly longevity, plays a crucial role, especially concerning survivorship options for the pension. If a pension includes survivorship benefits and the retiree is in poor health, it ensures income for both the retiree and their spouse even after the retiree's passing. Conversely, if the pension lacks survivorship benefits, a lump sum might be preferred, offering support to the surviving spouse after the passing of the retiree.

2. Retirement Income Needs:

If the pension represents a significant portion of an individual’s retirement income, opting for the pension provides stability and safety, shielding against market volatility. If the pension does not comprise a large amount of needed retirement income, investing the lump sum would be better suited for long-term investment growth, especially if no distributions are needed to sustain an individual’s retirement.

3. Age Difference:

A significant age difference between two spouses requires long-term planning to support the younger spouse’s financial needs, lifespan, and potential longevity. A pension with survivorship benefits ensures continuous income for decades. In contrast, a lump sum might be preferable if the pension lacks survivorship benefits, safeguarding assets for the surviving spouse.


While pensions provide a consistent stream of income, they lack flexibility. The lump-sum option provides flexibility to meet large expenses (particularly early in retirement) and allows one to leverage their assets as needed.

Employer Stability

The reliability of the pension hinges on the financial health and stability of the sponsoring company. If there are concerns about the long-term viability of the company and if they can make pension payments over a retiree’s lifetime, then it may lead individuals to opt for the security of a lump sum.

Risk Tolerance

Pensions offer low-risk, guaranteed income, suitable for individuals seeking stability. Conversely, those with a higher risk tolerance may be inclined towards investing the lump sum independently, giving them greater control and allowing for higher risk / return opportunities.

Weighing these factors alongside personal financial goals allows one to make a well-informed decision regarding their pension plan. Please reach out to us with any questions about determining the best course of action for your pension plan.

1 - https://www.bls.gov/ebs/publications/employee-benefits-in-the-united-states-march-2023.htm

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