Should You Take Pension Payments or a Lump Sum? A How-To Guide
Your employer doesn’t want to be in the pension business. It’s too expensive. Low interest rates force employers to beef up their pension contributions or invest in riskier assets to meet their plans’ assumed rates of returns.
For this reason, employers offer lump-sum buyouts. The company wants you to take the buyout so they can exit the pension business and save money. You can take the pension lump sum and roll it tax-free into an IRA.
But how do you evaluate a one-time lump-sum offer against the possibility of lifetime payments that a pension offers?
Should you take it or leave it? Here is one approach I use when evaluating a client’s pension offer:
Step 1. Run the numbers
Start by calculating the internal rate of return (IRR) of the pension. The IRR tells you the rate of return you would need to beat by investing your lump sum in order for it to make sense to take one. Here are the steps in Excel:
- In Column A enter the year in every row, 1-30 for example. In Column B enter your
