Lump Sum vs Annuity: Which Pension Option Is Better?

In this video, you'll learn the difference between taking your pension as an annuity vs. electing it as a lump-sum so you can determine what may make most sense for your individual situation.

Learn the tips & strategies to create your secure retirement.

⏰ TIMESTAMPS
00:00 - Introduction
1:35 - Maximizing Lifetime Payout
2:21 - Comparing Withdrawal Rates
4:12 - Example
7:57 - Lump Sum Withdrawal Rates
10:01 - Risk Tolerance
12:47 - Avoiding Annuity Option (is that smart)?
15:26 - Social Security Impact
16:33 - Legacy Goals
17:00 - How Your Pension Impacts Your Overall Strategy

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[carola]

Just watched this and it was very helpful although my husband and I are in a somewhat different situation. I am retiring this year after 27 years in public education...I will be 75 in July. My husband (turning 82 soon) was self-employed in a small business and only has social security. I say lump sum - although I don't want to invest...I just want some left for the grandkids...he says annuity. We have to decide soon. Even at this age, it's a still hard to decide!

[cynthiaowens]

I’ve read several articles where some people with a several $100K lump sum spend it in 5 years or less! Unfortunately, I know people who have experienced this situation…sad but true!

[jeremiahreilly]

James, excellent! So many "financial advisors" eagerly spout rules of thumb without any understanding of the underlying complexity and consequences of decisions. Choosing between a lump sum and an annuity is so much more than a calculation, as you point out: IRR, risk tolerance, legacy desires. You can add "state of health" to the consideration of life expectancy. If you or your spouse were seriously ill, you might choose to take a lump sum and "live it up" for a few years. Perhaps financially "sub-optimal" but emotionally very meaningful.

[pensacola]

The biggest consideration is if you want the lump sum amount in your estate.... Income is usually overall better for the retiree. Take the sure thing.... But if you want to leave a legacy, it is better to take the lump sum.. But you never know about the investment performance.

[Gypsy]

I am choosing the Annuity, here's why, the market's gains vs. mutual funds. Without going by what I've been told but looking at the actual gains in the different mutual funds there's a gap. Fees and other cost brings down the return and the market's recent downturns put the icing on the cake and I'm taking annuity. Yes, the average gain might be 8% in say the S&P 500 but even with the mutual finds in that market I haven't been able to get that return. Be careful what a financial advisor tells you as they are in it for the money, their money, not your money.

[vicros]

Another option for the lump sum is to buy a property and renting it. You get a monthly payment and appreciation of your asset. In addition you can leave it to your children as their inheritance. The cons are becoming a landlord and paying taxes on the property. The pros are appreciation and you can raise the rent to accommodate for annual inflation. Great video.

[schnell]

Very well presented. This is a situation that we will be facing in a few years and we have been running the numbers to make the best decision. I am leaning towards lump sum to have control of our money and leave a legacy as you mentioned. Thanks again for producing such informative videos.

[christopherhennessey]

My pension comes with a 3% annual COLA.

[MrMaxamillion]

I enjoy your videos. My wife has a teacher retirement annuity and I have a 401K plus a pension. When I retire I am looking at taking the annuity vs the lump sum. I am looking at retiring at 62, which is in 6.5 years, and have been given estimates of 7.2% for annuity payouts. If I take the annuity and take my Social Security at 70, I should only have to take out about 2% of my portfolio to help keep up with inflation. With my wife's pension and Social Security, we should be making more retired than we were working.

[Fell]

On of the best videos I’ve seen on this topic. Nice work.

[EdfromCanada]

This is an excellent well balanced approach. I would take the lump sum hands down. I ran the numbers in depth and concluded that an annuity is a lousy bet.

[murrayspiffy]

I disagree with the comment at 1:40 - *Maximin Payout* is not as important than *Securest Payout* - meaning - humane nature is a fickle thing and taking a little less can be a lot better for the human soul than continually stressing about how to maximize the assets I have like chess pieces on a board. A lot can be said for - *_x amount is coming in next month - and I can live really well on that - and I don't have to worry about a lot of extra curricular ongoing problems - because I'm relaxing playing checkers._*

[ItsEverythingElse]

There is investment risk for lump sums but there is inflation risk for annuities.

[jhors]

Thank you for posting this helpful video

[roseb.]

3 weeks of stress until I found your video. Thank you much for helping me yo make the best decision for myself and my family. I appreciate

[stevehowe]

I think you have a typo on the $ amount you list on at the 4 minute 56 second mark

[davsmith]

Can you review your numbers displayed around 4:49 and after? I think your lump sum total of 1, 000, 436 is either wrong or what you said was wrong.

[clevelog]

AS INTEREST RATES RISE, THE LUMP SUM DECREASES. I hope that when/if interest rates decrease, the lump sum will increase. Lump sum values looked very good when interest rates were zero. Not the case today. Thank you for a fine presentation.

[scottbradley]

So the assumption is - take less money (in total dollars) in the early years but with a 3% annual interest it will catch up and exceed that annuity amount after ten years. You said a lot more then just than just that, but...

I have to believe that my income needs will be the highest in the first ten years of retirement - and reduce over the remaining years.

My 85 year old mother lives a pretty quiet and inexpensive life - with her biggest expenses being gifts for the grand children...

But at 65 she and my father were traveling the world.

The question: If a guy does not care if he leaves a single dime in his estate after he dies, does this change the calculation at all?

[lqxzuie]

Excellent balanced approach to this topic. What I've chosen to do is a bit of both rather than an all or nothing decision. I put about 25% of my assets to annuities to create an income floor that will be there regardless of the vagaries of the market with the remaining 75% invested in a mix of market and non market assets to give growth to account for inflation. The annuities plus my expected social security should cover my essential expenses to give me the peace of mind to remain invested in the market come what may. Then I can draw from this investments to adjust the annuity income for inflation.