A friend of mine was asking me about pension fund distribution.  His company is offering one-time buyout of $300k lump sum or he can take monthly payment of $1,500.  The question is whether he should take the lump sum or monthly payment?

There are some questions that can help decide whether to take the annuity or the lump sum.

By using this $300K lump sum and $1,500 monthly pension payment as an example, let’s take a look at this.  The $1,500 monthly payment represents 6% of return from $300K.

This friend of mine does not need $1,500 monthly payment for his living expenses. – Lump Sum

(The money can be invested in the market by himself)

He has a child whom he wants to pass the money to.  – Lump Sum  (If a person chooses the pension plan survivor benefit, the monthly payment will be significantly reduced based on the percentage of payment that the survivor gets.  Taking the lump sum is a better way to pass down the money.)

His monthly payment is not inflation adjusted. – Lump Sum  (6% return will not increase since it is not inflation adjusted)

His net worth is about $3M. – Monthly Payment  ($300K represents only 10% addition to the net worth of $3M, not significant enough)

His company business prospect is good. – Monthly Payment  (Chances for the company going into bankruptcy are low and his pension will be there)

His company pension does not carry a medical plan for retirees – Lump Sum (if there is a medical plan in the pension starting at 62 year old, you should seriously consider to take the monthly payment.)

In this example, the decision should be taking the lump sum.  In the end, this friend of mine has decided to take the lump sum of $300K.

After deciding to take the lump sum, you can roll the money to a Rollover IRA account with Fidelity or Schwab and manage the money yourself.  Since the rollover is not a taxable event, you have no tax liability until you take the money out.