Personal Finance

My old job had a pension and they offered me to cash out for $24k or get $100 per month for life - which should I choose?

Maurie Backman

Published: February 5, 2025 1:18 pm

Last Updated: February 10, 2025 9:58 am

When I hear about people who are eligible for a pension from an employer, I tend to find myself a little jealous. Aside from Social Security, any money I have available in retirement is money I’ll probably have to save myself.

But the reality is that private sector companies have largely done away with pensions in favor of forcing employees to save for retirement on their own. If you’re lucky, you might have a 401(k) match thrown into the mix.

I’m self-employed, so I get none of that. But I also get to set my own hours and work from the beach if I so choose, so there’s that.

Meanwhile, I recently came across a Reddit post where the author is in an interesting situation. They’re entitled to a pension from work, and they have the option to either take about a $100 monthly payout for the rest of their life, or cash out their pension at around $24,000.

I’m sure it’s not an easy decision to make. But there’s actually a pretty simple way to arrive at a smart choice.

It’s all about calculating your break-even age

The decision to cash out a pension versus take a monthly payout should hinge largely on how long you think you’ll live. So to that end, you’ll need to figure out your break-even age.

Here, the math is pretty simple. The poster could get $100 a month indefinitely, or settle for $24,000 up front. So their break-even age is the age at which they can get the lump sum plus 20. If they’re eligible for the lump sum at 65, it means at age 85 they should wind up with the same amount of money whether they get the $24,000 in full or take $100 a month.

So if they think they’ll live past age 85, then the monthly payments make sense. If they don’t expect to live that long, they should probably take the lump sum. And you can apply a similar formula to your situation if you’re in the same sort of boat.

Of course, there are other considerations, too. With a monthly payout, there’s some amount of money coming your way for as long as you live, and you might live longer than expected. So the monthly payout could give you more peace of mind.

On the other hand, if you take the lump sum, you can invest it and grow it into more money over time. So there’s that benefit, too. Plus, the lump sum could address a near-term financial need or goal.

Say the lump sum allows you to enjoy your dream vacation at a time when your health is still good. The monthly payout might give you more money all-in. But it may not help you meet that goal if, by the time you have enough cash, you’re no longer in good enough physical shape to pull that dream trip off.

It’s not that simple

While the above scenario is “simple math,” reality is much more complicate.

One key factor to consider is the time value of money—the idea that a dollar in hand today is worth more than a dollar received later because of its potential to grow.

Assuming a 5% annual return on your investments dramatically alters the math: while the headline numbers suggest that $100 a month for 20 years equals a $24,000 lump sum, when you factor in compound interest, the lump sum option actually pulls ahead.

For instance, if you invest the $24,000 immediately at 5%, it compounds over time much more effectively than receiving $100 monthly and reinvesting each payment.

In fact, under these assumptions, it would take nearly 78 years for the reinvested monthly payments to catch up with the compounded growth of the upfront lump sum.

In practical terms, unless you expect an extraordinarily long life, leveraging the power of compound interest by taking the lump sum typically makes more financial sense.

Consult a financial advisor for help

It happens to be that the poster here isn’t looking at such a large pension. But if yours is considerably more generous, then I’d highly recommend talking to a financial advisor and getting their help in making the decision.

A financial advisor can help you run the numbers to figure out which route to take. They can also point out the different factors you’ll need to consider when deciding what to do – ones you or I may not be thinking of.