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In March 2025, only 14% of private industry workers had access to a defined benefit plan. As companies shift toward defined contribution plans, such as 401(k)s, pension buyouts are becoming increasingly common.

A pension buyout is a significant financial decision, and once you make it, you can’t go back. This choice is about more than money, it’s about control, flexibility, and what you want your retirement to look like.

In this episode of Money Wisdom, Nicholas J. Colantuono, CFP® explains how to think about this decision in a way that fits your bigger financial picture.

What Is a Pension Buyout?

While some traditional pensions only provide lifetime income, others also offer a lump sum payout. A pension buyout is the option to take that lump sum instead of monthly payments for life. If you have access to a pension, it’s critical to have a clear plan before deciding.

Market Impact

Higher interest rates generally mean lower lump sum payouts, while lower interest rates mean higher lump sums. That’s because in a higher rate environment, a smaller amount can generate the same income. In a lower rate environment, it takes more money to produce that same income. These values are constantly changing, so it’s important to review the most updated estimates.

Pros and Cons of a Lump Sum

Taking the lump sum gives you a large amount of money upfront. You can roll this money into a tax-deferred IRA and use it to plan for income, growth, and flexibility. You can also use it to support strategies like Roth conversions, gifting, or legacy planning.

With a lump sum, you can still generate income while keeping access to the principal for other needs. But you take on the responsibility for ensuring the money lasts as long as you do.

Pros and Cons of Monthly Payments

Of the two options, taking the monthly payments is simpler. You receive a fixed, guaranteed income for the rest of your life, but in exchange, you give up flexibility. Once you pass away, the monthly payments stop and there’s nothing left to leave behind.

Pension income is also taxable and can impact your tax bracket, Social Security, and Medicare premiums. In addition, most pensions do not adjust for inflation, so your purchasing power will decrease over time.

Key Factors and Risks to Consider

If you already have enough income, taking additional pension income may increase your tax burden. Your health and life expectancy must also factor into your decision-making. If you expect to have a shorter lifespan, taking the lump sum may make the most sense, especially from a legacy standpoint.

With a lump sum, however, your investment discipline is crucial. If you take a large payout, you need a plan for how to manage it effectively. Risks include making poor investment decisions, failing to keep pace with inflation, and paying unnecessary taxes.

These are high-stakes decisions that you cannot undo. Make sure to carefully evaluate all factors before choosing the approach that best fits your situation.

Want to get the most out of your retirement? Get your free Guide to Maximizing Retirement book by texting “MAX” to 800-757-0436.