Ask Terry Questions Pension:Lump sum or Annuity

Pension:Lump sum or Annuity

By Terry Savage on May 22, 2015 | Financial Planning / Retirement

I am 60 and leaving my company with a severance package. What are your thoughts on taking my pension payout as a lump sums vs. an annuity. Pension Options:
(1) $945,000 lump sum
(2) $60,000/yr. lifetime annuity
(3) $472,500 lump sum plus $30,000/yr. lifetime

What should I consider in making this choice?

Terry Says:   Well, the first thing to figure out is whether $60,000 per year is a reasonable lifetime payout.  To do that I went to and simply entered the facts you gave me:  male, age 60, immediate annuity, $945,000 to invest.  I came up with an average payout of about $56,000 per year — so the lifetime annuity payout you are being offered seems reasonable.  (Remember, you don’t have to take the deal they offer. If you found a payout with better terms or payout amount, you could roll the lump sum into another annuity.)

You didn’t mention a spouse, but that might be a consideration — a payout that lasts over both your lifetimes.

Once you figure out that the amount is ok, a lot of the rest of the decision is subjective.  If you roll the amount over, perhaps to Fidelity or Vanguard, they can help you figure out a withdrawal amount — based on some conservative investment choices — that will give you a “reasonable likelihood” that your money will last your lifetime.  But if you live to a ripe old age, that might not be a correct estimate.  A lifetime annuity gives you that guarantee.

BUT the annuity is a fixed amount of money each year.  And if we have inflation at “only” the historic rate of 3 percent, the buying power of your money will be cut in half in 25 years.  And age 85 is certainly a reasonable life expectancy.  Moreover, with the fixed immediate annuity if you die in only 10 years, the insurance company wins!They get to keep the balance of the money.

Perhaps, splitting the difference might be a good choice — but you should run the numbers for a $472,500 number at the website linked above.  A lot depends on your other savings, your debt, your personal circumstances.  If that’s complicated, then seek the services of a fee-only financial planner via

And one more — unsolicited — thought.  It’s nice to consider retiring at age 60.  But you certainly don’t want to start taking Social Security early — a very costly move.  And you should have more than an instinctive idea of how long you might live, so take the quiz at  What I’m subtly saying is that even if you leave this job, you might want to consider how you could earn an extra $30,000 a year so you don’t need to lock all your money up in an annuity.

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