When preparing for retirement, one of the biggest financial decisions you may face is whether to take a pension as a lump sum or opt for monthly payments. This dilemma recently came up on Suze Orman‘s “Women & Money” podcast, where a listener named Ellen shared her concerns about an upcoming retirement decision. Ellen was torn between taking a $450,000 lump sum or a $3,000 monthly pension and sought Orman’s advice.
Ellen wrote, “I had planned to take my pension in a lump sum, approximately $450,000 mainly because I feel it can grow much more than receiving it monthly.” However, she also acknowledged that with the pension and Social Security, she would hardly need to touch her investments except for large expenses. This uncertainty led to her feelings of anxiety about making the right choice.
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Orman approached the question by first identifying an important factor: Ellen did not mention having a spouse. This suggested she was likely considering a “life only” pension, meaning the $3,000 monthly payment would stop upon her death. Without a spouse or dependent beneficiary, the pension would not be transferable, which could impact her long-term financial security.
Orman then broke down the numbers. The $3,000 monthly pension amounts to $36,000 per year, which is about an 8% return on the $450,000 lump sum. This guaranteed income would be stable and unaffected by market fluctuations. However, it would also be fully taxable and would not increase with inflation.
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On the other hand, if Ellen took the lump sum and rolled it into an IRA, she could invest it to generate returns. Orman stated that assuming a conservative 5% return, Ellen would receive about $1,800 per month—substantially less than the pension payments. At a 7% return, she could generate around $2,600 per month, which is still lower than the guaranteed $3,000. More importantly, investment returns are not guaranteed, and market downturns could reduce her income over time.
Given Ellen’s situation, Orman suggested a balanced approach. She recommended considering a combination strategy, such as rolling over a portion of the lump sum into an IRA while using the rest to purchase an income annuity. This would provide a mix of security and growth potential.
