If You Have $620,000 Saved at 67 and a $90,000 Pension Buyout Decision, Here Is the Lump Sum Math

A former employer sends a one-page letter offering two choices: accept a $90,000 lump-sum payment today or continue receiving $720 per month for life. You are 67, single, retired from a manufacturing job, and already have $620,000 saved in a 401(k). With only a few weeks to decide, the choice may seem straightforward, but selecting the less favorable option could cost tens of thousands of dollars over the coming decades.

Situations like this arise frequently. In April, financial advisor Wes Moss discussed a nearly identical scenario on The Clark Howard Podcast, helping a caller named Alex evaluate a choice between a $58,000 lump sum and $411 per month in pension payments. Moss used what he calls the 6% test to determine whether the annuity offered sufficient value. The same principles apply in this case, although the financial stakes are larger.

The situation in one block

• Age and household: 67, single, retired manufacturing worker
• Investable assets: $620,000 in a 401(k), plus Social Security
• The offer: $90,000 lump sum in exchange for waiving a $720/month vested pension ($8,640/year)
• Core tension: guaranteed lifetime income with no inflation protection versus a flexible pile of capital with market risk
• What is at stake: roughly $60,000 to $70,000 of lifetime value, depending on returns and longevity

The payback rate is the whole game

Divide the annual pension by the lump sum. $8,640 divided by $90,000 is about 10%, meaning the pension pays back the lump sum in about 10 years. That number is the single most important figure in this decision. Anything above roughly 8% is a generous offer for a 67-year-old; anything below 6% is a poor offer that strongly favors taking the cash.

At roughly 10%, this offer sits in the middle. The employer is essentially telling you that surviving past age 77 or 78 is where the annuity starts to beat the cash. Life expectancy at 67 for an American man is about 16 more years, for a woman closer to 19. So on longevity alone, the annuity looks defensible.

Then add the return environment. The 10-year Treasury yield is almost 5%, the 10-year real (inflation-adjusted) yield is about 2%, and the Fed Funds upper bound is almost 4%. A retiree can lock in almost 5% risk-free for a decade, or aim for 5% to 7% nominal in a balanced portfolio.

Run the math the employer is hoping you do not run. Compounding $90,000 at 5% for 20 years gets you to about $238,800. The annuity pays $172,800 nominal over the same window. The lump sum wins by about $66,000. Drop the assumption to 3% and the lump sum still wins by about $11,000. Below roughly 3%, the annuity wins.

Here is the catch most retirees miss. CPI is running about 2% and core PCE, the Fed’s preferred gauge, is near the 2% target. Private pensions almost never carry a COLA, so that $720 check buys measurably less each year. Twenty years of 2% inflation cuts real purchasing power by roughly a third.

Three paths, ranked honestly

1. Take the lump sum and direct-roll it to an IRA. This is the right call for most readers in this exact scenario. You already have $620,000 and Social Security covering baseline expenses, so you do not need the $720 check to eat. The lump sum invested at 4% to 5% beats the annuity over a normal lifespan and beats inflation. Use a direct trustee-to-trustee rollover so the employer does not withhold 20% for taxes.
2. Keep the pension if guaranteed income is what helps you sleep. If markets terrify you and you would otherwise sit the $90,000 in cash earning nothing, the annuity wins by default. Wes Moss makes the same point: it is hard to guarantee yourself a high single-digit return, and a pension removes that risk entirely.
3. Skip any rollover into a commercial annuity. Suze Orman occasionally suggests buying an income annuity inside an IRA with part of the lump sum. At today’s rates that usually pays you less than the pension would have. Avoid it.

What to do this week

Request the actuarial assumptions and PBGC interest rates the plan used to calculate the $90,000 offer. If the discount rate they used is materially higher than today’s Treasury yields, the offer is undervaluing your pension and you should lean toward keeping the monthly check. Confirm the plan’s PBGC insurance status at PBGC.gov, and read IRS Publication 575 before signing any rollover paperwork. The single most expensive mistake is taking a check made out to you personally and triggering the mandatory 20% withholding. Make the rollover direct.