How I Help a Client Decide Between a Pension Lump Sum and Lifetime Income
For many executives in the Detroit area, retirement includes a decision that feels simple on the surface and permanent underneath:
Take the pension as a lump sum or
Elect lifetime monthly income
On paper, it looks like a math problem.
In reality, it is a structural decision that affects:
Portfolio risk
Survivor income
Estate flexibility
Tax exposure
Legacy planning
Here is how I approach it with clients.
Step 1: Separate Emotion From Structure
Most people lean instinctively one way.
Some say:
“I don’t trust the company. I want the lump sum.”
Others say:
“I like the guarantee. I want the income.”
Neither instinct is wrong.
But neither is sufficient.
The right decision depends on how the pension integrates with the rest of the household balance sheet.
In Grosse Pointe, many households making this decision already have:
$3M+ invested
A primary residence
Possibly property up north or in Florida
Adult children
This is not a vacuum decision.
It is an integration decision.
Step 2: Analyze the Household Balance Sheet
If a client already has substantial fixed income sources:
Social Security
Rental income
Bond ladders
Annuity streams
Then adding more guaranteed income may not materially change stability.
In that case, the lump sum may increase flexibility and estate efficiency.
But if most assets are:
Market-based
Concentrated in equities
Exposed to volatility
Then lifetime income may meaningfully reduce sequence risk.
The key question is:
Does the household need more guaranteed income, or more flexibility?
Step 3: Model Survivor Scenarios
This is often where the decision becomes clearer.
Questions we run:
What happens if one spouse lives 25 years longer?
What happens if markets decline early in retirement?
How does single filing status change taxes?
What income remains after the first death?
Pension elections often reduce or eliminate payments after the first spouse passes unless a joint option is selected.
The cost of joint options is real.
The value of survivor stability is also real.
We model both.
Step 4: Evaluate the Implied Rate of Return
Every lump sum offer has an embedded assumption.
If the pension is offering:
$6,000 per month for life
Or a $1.2M lump sum
There is an implied internal rate of return behind that choice.
We calculate:
Break-even ages
Required portfolio return to outperform the income stream
Inflation sensitivity
In low-rate environments, lump sums often look less attractive relative to guarantees.
In higher-rate environments, they can look more competitive.
But this is not just about math.
Step 5: Consider Estate and Legacy Implications
This is where affluent households often lean lump sum.
A lifetime pension generally:
Stops at death (or second death if joint option)
Leaves nothing to heirs
A lump sum:
Remains an asset
Can be invested
Can be gifted
Can be structured in trusts
If legacy and intergenerational planning are priorities, that flexibility matters.
The pension decision is not just about retirement income.
It is about whether you are converting an asset into a consumption stream permanently.
Step 6: Tax Coordination
Lump sums rolled into an IRA remain tax-deferred.
Monthly pension income is fully taxable annually.
The choice affects:
Required Minimum Distributions
Roth conversion capacity
Medicare IRMAA exposure
Future bracket compression for a surviving spouse
Sometimes a client chooses lifetime income not because it produces the highest return, but because it simplifies tax structure and reduces portfolio draw pressure.
What I Tell Clients
There is no universally correct answer.
But there is a correct answer for your balance sheet.
In Grosse Pointe, most households deciding this already have significant accumulated wealth.
The decision is less about “maximizing” and more about:
Balancing guarantees with flexibility
Protecting a surviving spouse
Managing tax exposure
Preserving estate structure
The mistake is deciding based on instinct or fear.
The right approach is modeling both outcomes inside the full plan.
Because once elected, pension decisions are typically irreversible.
And irreversible decisions deserve deliberate structure.
