Question 1

Should I take the pension lump sum or the annuity?

Accepted Answer

There's no universal answer — it depends on your life expectancy, your discount rate (effectively your expected investment return), inflation/COLA on the annuity, whether you're electing a joint-and-survivor option, and whether your pension is well-funded. The annuity hedges longevity risk; the lump sum offers control and inheritability. Run the NPV math both ways before deciding, and consider that pensions are typically backed by PBGC insurance up to a limit.

Question 2

What's the right discount rate to use?

Accepted Answer

Use a rate that reflects what you could realistically earn on the lump sum, after-tax, with risk you'd actually take in retirement. A common starting point is 4-6% — roughly the long-term return on a balanced portfolio. Higher discount rates favor the lump sum (because future annuity payments are worth less today); lower rates favor the annuity.

Question 3

What is the joint and survivor election?

Accepted Answer

If you're married, most pensions offer a joint-and-survivor option that continues a fraction (typically 50% or 75%) of your benefit to your spouse if you die first. The trade-off: your monthly benefit is reduced (often by 5-15%) compared to single-life. The longer your spouse's life expectancy and the larger the survivor fraction, the more valuable the election. Spousal consent is required to waive it.

Pension Lump Sum vs Annuity

Pension Offer

Recommendation

Lump Sum (NPV)

Annuity (NPV)

Break-Even Age

Total Annuity (Nominal)

Lump Sum at Horizon

Cumulative Value by Age

Year-by-Year Schedule