I’m 66 and retiring soon – should I take my pension as a $520k lump sum or $3,000 monthly payment for life?

When one approaches retirement, a lot of big financial decisions need to be made. And, of course, one needs to be informed enough to make the right move that will set the tone for one’s golden years. Indeed, there are opportunity costs on both sides of the coin when it comes to deciding between taking one’s pension as a lump sum or a steady stream of monthly cash flows. 

In this piece, we’ll check out the case of a Redditor, 66, who posted on r/personalfinance seeking advice on whether it’s a better idea to take the big chunk of cash or settle for a respectable $3,056 per month for the rest of their life. Indeed, a financial advisor is a must in this case, given the complexities and further detail about the pensioner’s lifestyle and other factors that are worthy of noting before finalizing a decision.

The great pensioner dilemma: Income stream or big cash pile? 

While delaying gratification can be a good move, I don’t always think it’s the best deal. Undoubtedly, getting $3,000 per month in perpetuity would cause one to have less worry about running out of money in the midst of retirement. However, taking a lump sum and investing the proceeds in passive income-generating securities can also do the job.

Additionally, one’s sizeable cash pile would be nice to pass down to loved ones in case one doesn’t live as long as they expect. Additionally, having the cash pile means having greater flexibility to take care of those hefty financial surprises that can and do happen at the worst of times.

While I don’t have the full picture with this retiree (a financial advisor would, and they should definitely seek out one as soon as they’re able), I am leaning towards taking the $520,000 lump sum for greater flexibility. However, that’s just me.

Crunching the numbers

You can crunch the numbers all you like, but there will still be uncertainties regarding how long one will live. If you were to opt for $3,056 per month, it would take nearly 15 years to hit the sum the pensioner would have received today. And, of course, that’s not even accounting for inflation that will erode one’s purchasing power over the years. Like life expectancy, inflation will be impossible to predict over such a timespan. Who knows? Deflation may be factored in as well if AI replaces jobs in record numbers and no sort of universal basic income (UBI) ends up ever happening in the distant future. 

Even if the person were to live for another 30 or 35 years, I think taking the cash makes sense because it’s just nicer to be able to have access to funds in one’s earlier retirement years. The so-called go-go years could see retirees spend more on vacations and other costly experiences as they aim to check off all the items on their bucket list. As one gets older, the window of experiences tends to close a bit, and so too could one’s spending. That’s why I think it’s a better move to take a lump sum, even if it means leaving money on the table. 

You can still get some decent passive income by taking the money and investing it

At the end of the day, it’s not all about the math. It’s about allocating the right amount of cash over time in an optimal way. Additionally, a lump sum of cash could be invested in dividend-paying assets.

Though you probably shouldn’t aim to get the same magnitude of monthly income in the equity markets (think a yield north of 7%), given the high-risk, higher-yielders entail, I do think that some dividend stocks can help retirees find a good balance of passive income and appreciation.

Indeed, a 4%-yielding dividend portfolio would lead to $20,800 per year or around $1,733 per month, just over half of what the pensioner would have received monthly. In any case, other aspects, such as portfolio size, should also be considered before deciding on the monthly income stream or the lump sum. As always, personal finance is deeply personal, making an advisor more than worth the fees.

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