A 63-year-old hospital vice president has roughly six weeks to lock in her pension election. Her plan offers two paths: a $1,400,000 lump-sum cash equivalent rolled into an IRA, or a $77,000 joint-and-survivor annuity covering her and her husband for life. She is taking the lump sum, and the reasoning runs deeper than the breakeven math.
The Payout Rate Looks Generous Until You Price Optionality
The annuity’s 5.5% effective payout rate compares favorably to today’s 10-year Treasury yield of about 4.4%. The breakeven on a 5% real return assumption sits near age 90. Past 90 the annuity wins. Before 90 the lump sum wins. Assume a 7% nominal portfolio return, closer to long-run equity averages, and the lump sum wins through any reasonable life expectancy.
The real yield curve makes that 5% assumption defensible without heroic equity exposure. 30-year TIPS yield almost 2.8% real, and 10-year TIPS yield close to 2% real. A balanced portfolio that layers an equity risk premium on top clears 5% real comfortably over multi-decade horizons.
Five Reasons the Lump Sum Wins Before the Math Does
The breakeven model assumes the annuity stream meets every future need, an assumption that breaks down quickly in retirement.
- Liquidity for shocks. A roof replacement, a long-term-care event, or a family emergency cannot be funded from an annuity check. A rollover IRA can be tapped for whatever amount the moment demands.
- RMD timing control. Annuity payments begin immediately and land on the 1040 as ordinary income every year. A rollover IRA defers required distributions until age 73, opening a 10-year window where taxable income can be sculpted deliberately.
- Inheritance. The joint-and-survivor annuity dies with the surviving spouse. Whatever remains in the IRA passes to children or other beneficiaries.
- Roth conversion optionality. Annuity income cannot be converted to Roth. IRA balances can, and the years between 63 and 73 are the most valuable conversion window most retirees ever see.
- Inflation protection. The pension is almost certainly not COLA-adjusted. CPI has climbed from 320.6 in May 2025 to 332.4 in April 2026, and core PCE sits in the 90th percentile of its 12-month range. A fixed $77,000 buys less every year. An invested portfolio can grow with prices.
The Roth Conversion Window That Justifies the Decision
From age 63 to 73, she controls her own taxable income. With no annuity forcing $77,000 onto her return every year, she can layer Roth conversions to fill the 22% or 24% bracket and stop. Repeated across a decade, the strategy can shift several hundred thousand dollars into a tax-free bucket before RMDs and Social Security combine to push her into higher brackets.
Skip this window and the tax cascade compounds. Traditional IRA withdrawals count as ordinary income. Above the IRMAA thresholds, Medicare Part B and D premiums increase under IRMAA surcharges, with a two-year lookback on income. Above the Social Security taxation thresholds, up to 85% of benefits become taxable. The effective marginal rate on a 22%-bracket retiree who trips both can approach 40%.
What to Do Before Signing the Election Form
- Request the lump-sum equivalent calculation in writing. Ask the plan administrator which interest rate assumption was used. PBGC rates and IRS Section 417(e) segment rates produce materially different lump sums. A small change in the discount rate can move the cash equivalent by tens of thousands.
- Execute a direct trustee-to-trustee rollover. A check made out to the participant triggers 20% mandatory federal withholding and a 60-day clock. A direct rollover to the IRA avoids both.
- Map a 10-year Roth conversion schedule before the first conversion. Model the conversion amount against today’s 3.75% Fed Funds rate, projected Social Security claiming age, and the first IRMAA tier. If combined income will cross the first IRMAA threshold, the planning alone justifies a fee-only advisor.
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