Deciding between a lump sum and a monthly pension comes down to a few personal factors. Here's how to think it through.
What factors should drive my decision?
Five factors usually matter most: your health and life expectancy, your other guaranteed income, your comfort managing investments, your survivor needs, and taxes. A monthly pension is essentially longevity insurance—it pays as long as you live, which protects you if you live longer than expected or fear market swings. A lump sum suits those with other reliable income, investing experience, a desire to leave money to heirs, or a shorter expected lifespan. Crucially, make sure your fixed costs—housing, food, Medicare premiums, and a Medigap plan—are covered by guaranteed income before choosing the lump sum and taking on market risk.
How do taxes and Medicare factor in?
Taxes can tip the scales. Taking a lump sum as cash may trigger a large tax bill, while rolling it into an IRA defers taxes but leaves you managing the money. A big one-year income spike from a lump sum can also raise your Medicare Part B and Part D premiums through IRMAA. A steady monthly pension keeps income predictable and easier to plan around. Whichever you choose, confirm that Medicare and a Medigap plan are budgeted so a hospital stay doesn't undo your decision. For free help planning that coverage, call 1-800-MEDIGAP (1-800-633-4427).