The 2020 pandemic has resulted in economic strain for many American corporations — even long-established entities. Therefore, it’s important for would-be pensioners to consider their employer’s long-term financial stability in light of the country’s circumstances.

Note that while the federal Pension Benefit Guaranty Corporation (PBGC) may offer relief when an employer becomes insolvent, this guarantee works much like filing for bankruptcy. In other words, it may pay out only a certain percentage of promised benefits.¹

The following hypothetical example gives you a snapshot of what you could expect in terms of risks and benefits when deciding between pension income and a lump-sum payout. In this scenario, a single pensioner qualifies for $1,625 a month for life, or a one-time, lump-sum payment of $300,000.

Pension Income

Pension income has been a less attractive option in recent years due to sustained low interest rates, which yield a lower pension benefit. Also consider that few pensions offer a cost-of-living adjustment. While some pensions offer spousal benefits, typically there is no death benefit for heirs. Also note that most pensions are funded with pre-tax dollars, so payments are usually taxable as ordinary income.

Age 65, Annual Pension Income: $19,500 ($1,625 per month)²

Total pension payout
Death at age 80	$292,500
Death at age 90	$487,500

• Pros: Guaranteed income for life
• Cons: Risk of guarantor financial instability (and reduced benefit), no hedge against rising inflation, no death benefit for heirs

Lump Sum, Invested

When offered a lump-sum option, the amount is generally lower than the expected total of lifelong benefits. However, a lump offers the opportunity to invest for a higher return over the long haul. Note that if the retiree doesn’t direct the lump-sum distribution into an IRA or other qualified account, he’ll owe taxes on the full amount in the year received.

Age 65, Lump Sum Distribution: $300,000 invested for $19,500 annual withdrawals ($1,625 per month)³

	1% average annual return	4% average annual return	6.5% average annual return
Death at 80	Total payout: $292,500 Death benefit: $31,262	Total payout: $292,500 Death benefit: $134,205	Total payout: $292,500 Death benefit: $269,349
Death at 90	Total payout: $323,880 Run out of money by age 82	Total payout: $445,427 Run out of money by age 88	Total payout: $487,500 Death benefit: $225,360

• Pros: Invest for growth opportunity, control and flexibility, take distributions as needed, potential death benefit for heirs
• Cons: Market risk/risk of loss, variable income, risk of running out of money

As you can see in this hypothetical example, a conservative rate of return could work as long as the investor dies by age 82. If he lives beyond that age, it would be necessary to achieve a higher sustainable rate of return. In today’s market, it can be tricky trying to find a high-yielding income vehicle without taking on too much risk.

Whether it’s best to take a lump sum or take pension income depends on your personal circumstances, and you should speak with a qualified professional to help you make that decision.

This is a hypothetical example provided for illustrative purposes only; it does not represent a real life scenario, and should not be construed as advice designed to meet the particular needs of an individual’s situation. It does not illustrate any specific investment product and is not an indication of past or

future results.

¹ Sarah O’Brien. CNBC. June 11, 2020. “Pandemic creates pension plan tension: Take the lump sum or trust lifetime payments.” https://www.cnbc.com/2020/06/08/pandemic-creates-pension-tension-take-lump-sum-or-trust-lifetime-payments.html. Accessed Aug. 10, 2020.

² Rob Williams. June 28, 2019. “Lump Sum vs. Annuity.” https://www.schwab.com/resource-center/insights/content/lump-sum-vs-annuity-1. Accessed Aug. 10, 2020.

³ Dinkytown.net. Aug. 10, 2020. “Savings Distribution Calculator.” https://www.dinkytown.net/java/savings-distribution-calculator.html. Accessed Aug. 10, 2020.

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In today’s market, it can be tricky trying to find a high-yielding income vehicle without taking on too much risk.

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