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?

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.

The 2026 Reality Check: While the math seems simple, you have to look at the current interest rate environment. The IRS “segment rates” used to calculate these lump sums have shifted. Federal law requires pensions to use Minimum Present Value Segment Rates to calculate payouts, and these rates have an inverse relationship with the lump sum value. With the IRS keeping segment rates elevated in Notice 2026-31, current lump sum offers are significantly smaller than they were during the low-rate environment of 2020 and 2021. As a general rule of thumb, a 1% increase in segment rates typically reduces a lump sum value by roughly 10%. Furthermore, consider the 2.8% Social Security COLA increase for 2026. While Social Security adjusts for inflation, most private pensions are fixed. That $100 might buy a decent dinner today, but in twenty years, it might only cover the appetizer.

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. Plus, the lump sum could address a near-term financial need or goal—like a dream vacation while your health is still good.

It’s not that simple

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

There is an immediate mathematical reality to consider with today’s interest rates. If you take the $24,000 lump sum and park it in risk-free assets like Treasury bills, CDs, or a High-Yield Savings Account yielding around 5%, that generates $1,200 a year in interest. Divided by 12, that is exactly $100 a month. This means you can generate the exact same monthly income the pension offered without ever touching a single penny of the $24,000 principal.

Assuming a 5% annual return dramatically alters the math on the growth side as well. While receiving $100 a month for 20 years technically equals $24,000, factoring in compound interest allows the lump sum to pull far ahead. In fact, under these assumptions, it would take nearly 78 years for reinvested monthly payments to catch up with the compounded growth of that upfront $24,000.

In practical terms, unless you expect an extraordinarily long life, leveraging immediate compound interest typically makes more financial sense, especially given the 2026 IRA contribution limits of $7,500 ($8,500 if you’re over 50), which allow for significant tax-advantaged growth.

The Tax Trap of “Cashing Out”

Be very careful with the phrase “cash out.” If you literally take a check made payable to yourself, it triggers an immediate, mandatory 20% IRS withholding, plus standard income taxes, and potentially a 10% early withdrawal penalty if you are under 59½. To actually harness the power of the $24,000, you must execute a Direct Rollover into a Traditional IRA. This shields the entire amount from immediate taxes and preserves the full balance for compound growth.

The Legacy and Portability Factor

In today’s economy, liquidity is king. One of the biggest drawbacks of a monthly pension is that it typically ends when you do. If you pass away early, that $100/month disappears, leaving nothing for your heirs. A $24,000 lump sum, however, is a transferable asset. Whether you roll it into an IRA for your spouse or keep it in a brokerage account as a “strike fund” for new business ventures, you maintain control over the wealth you’ve earned.

Company Solvency and Pension Insurance

While a $100 monthly liability is small, retirees with much larger pensions must consider the risk of their former employer going bankrupt. Pensions are insured by the government through the Pension Benefit Guaranty Corporation (PBGC), but that insurance is capped. For a 65-year-old retiring in 2026, the PBGC maximum guarantee tops out at $7,789.77 per month. Taking a lump sum and executing a rollover eliminates company risk entirely, shifting control of the assets away from the employer and directly into your hands.

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.

Editor’s Note: This article has been updated to detail how 5% yields allow a lump sum to generate the equivalent monthly pension income without touching the principal. Additional context has been added regarding the impact of IRS segment rates on lump sum calculations, the requirement of using a Direct Rollover to avoid tax penalties, and the limits of PBGC insurance in the event of an employer bankruptcy.