Dad’s Pension Will Offer Him $410,000 or $2,600 a Month. He Wants the Lump Sum and 5% Treasuries. The Math Will Be Closer Than He Thinks
When a pension pays out more than 7% of the lump sum every year, a Treasury ladder at 5% faces a steeper climb than most retirees expect, and the tradeoff hiding inside that gap can quietly reshape everything the heirs…
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A retiring father has two options from his former employer’s pension plan: a one-time payment of $410,000 or $2,600 a month for life. He prefers the lump sum, and he plans to buy Treasuries paying around 5%, live on the interest, and leave the principal to his children. People on traditional pensions face this choice all the time. With long-term yields hovering around 5%, the lump sum looks better now than it has in years.
A similar question came up on The Clark Howard Podcast this spring. A listener named Alex in Michigan had to choose between a $58,000 lump sum and $411 a month. Advisor Wes Moss worked out that the pension paid about 8.5% of the lump sum each year. He called that rate “hard to guarantee yourself.”
A 7.6% Payout Against a 5% Coupon
Dad’s offer works out to about 7.6% of the lump sum per year. In a September episode, Moss laid out his rule of thumb: “If it’s 6% or lower, just stick with a lump sum.” Dad’s offer is well above that line.
Treasuries at 5% would pay about $20,500 a year on the full lump sum. That’s roughly $1,708 a month, compared with $2,600 from the pension. A flat 5% also isn’t on offer at every term. Recently the 5-year Treasury yielded 4.8%, the 10-year 5.0%, and the 20-year 5.3%. Earlier in October, the 10-year was at 5.2%. Every bond that matures later will be reinvested at whatever rates exist then.
How Long He Lives Settles the Question
To get the same monthly income from Treasuries, Dad would have to spend principal. If he takes the pension’s annual amount from $410,000 earning 5%, the account runs dry in about 22 years. For someone retiring at 65, that happens in his late 80s, and if he lives longer, the pension keeps paying after the bond portfolio is gone. If he dies sooner, the lump sum leaves heirs money that a single-life pension would not.
The challenge is that neither option keeps up with inflation. A pension usually has no cost-of-living raise unless the plan document provides one, and a Treasury coupon never changes. At 3% inflation, $2,600 will buy only what about $1,440 buys today after 20 years. The BLS research index for Americans 62 and older rose 3.6% over the past year. Social Security, which will rise 3.6% in 2027, remains the inflation-adjusted part of his income.
Two Paths, and One Usually Comes Out Ahead
Take the Monthly Pension
For retired people in average or better health, this path pays more per dollar, removes reinvestment risk, and leaves no portfolio to manage at 85. Married retired people often look closely at a joint-and-survivor option. Moss stressed choosing either survivor coverage or a period-certain guarantee so the plan doesn’t keep the money after an early death. Pension checks are taxed as ordinary income. In 2026, a single filer pays 22% on taxable income over $50,400.
Roll the Lump Sum Into an IRA and Build a Treasury Ladder
This approach benefits a smaller group: people with health problems, people whose Social Security and savings already cover their spending, and people whose main goal is leaving an inheritance. A direct rollover into an IRA keeps the whole amount tax-deferred.
Cashing out instead triggers withholding and makes the full balance taxable that year. Once the money is in an IRA, required minimum distributions apply later, and missing one carries a 25% excise tax under 26 U.S.C. § 4974(a). People who choose this path usually do it to keep the principal, accepting lower income in exchange.
What to Check Before Signing the Election Form
Start with the payout rate and a realistic view of health and life expectancy. If the pension pays above 7% and Dad expects to live into his late 80s, Treasuries yielding about 5% are unlikely to match it. If he still wants Treasuries, he can buy them with other savings and take the pension as well.
The most common mistake here is comparing $2,600 a month from the pension with a Treasury plan that quietly assumes he’ll spend principal while also leaving it untouched for heirs. He can do one or the other with the lump sum. Spending only the interest means living on about $1,708 a month. If the pension plan offers several survivor percentages for a spouse, the choice is permanent, and an advisor who charges only fees and can model each option against the couple’s ages can make a real difference.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
