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Dad's Pension Will Offer Him $410,000 or $2,600 a Month. He Wants the Lump Sum and 5% Treasuries. The Math Will Be Closer Than He Thinks
24/7 Wall St. • • business
Key Points:
- A retiring father must choose between a $410,000 lump sum or $2,600 monthly pension payments, with current 5% Treasury yields making the lump sum more attractive than in recent years.
- The pension’s payout rate is about 7.6% annually, higher than the 5% yield from Treasuries, meaning the monthly pension provides more income than living solely on Treasury interest.
- If the father lives beyond 22 years post-retirement, the pension payments outlast the lump sum invested in Treasuries, but the lump sum offers an inheritance if he dies earlier.
- Neither option adjusts for inflation, so the purchasing power of fixed pension payments or Treasury interest will decline over time, unlike inflation-adjusted Social Security benefits.
- Choosing the pension suits healthier retirees seeking steady income without reinvestment risk, while the lump sum benefits those with health issues or inheritance goals; consulting a financial advisor is recommended before deciding.
