If you choose the wrong pension option, your spouse could lose $89,000 per year the day you die. And here's what nobody tells you about the pension vs lump sum choice: this isn't a financial decision. It's a sleep-at-night decision. Because once you choose, you're locked in. Permanently. No do-overs. No adjustments. No "wait, I changed my mind."
But the biggest mistakes happen when people compare a pension to stock market returns. That's like comparing a guaranteed paycheck to a lottery ticket. These are fundamentally different instruments serving different purposes.
The Trap of Comparing Apples to Lottery Tickets
Here's what happens in most pension meetings: Someone shows you that if you took the lump sum and invested it in the market, you could potentially earn more than the pension payments over time.
Potentially.
That word is doing a lot of heavy lifting.
A pension is a guaranteed stream of income. The stock market is not. Comparing them on rate of return alone ignores everything that actually matters:
Longevity risk – What if you live to 95? The pension keeps paying. Your lump sum? That depends on how well you managed it for 30+ years.
Sequence of returns risk – If the market tanks in your first few retirement years, your lump sum could be devastated. The pension doesn't care what the market does.
Sleep-at-night factor – Can you handle watching your lump sum drop 30% in a bad year, knowing that money has to last the rest of your life?
The pension isn't trying to beat the market. It's trying to give you a sense of certainty.
The $89,000-Per-Year Widow Problem
This is where I've seen the most painful mistakes.
Let's say you're married. You take the "single life" pension option because it pays more per month. You figure you'll invest the difference, and your spouse will be fine.
Then you die first.
Your pension stops. Completely. And your spouse just lost $89,000 in income per year.
Sure, they might have some investment accounts. But replacing nearly $90K in guaranteed annual income? That requires a massive portfolio – and flawless execution during one of the hardest periods of their life.
I've worked with hundreds of clients on this exact decision. The ones who choose the single-life option to "maximize returns" often leave their spouse in a terrible position. Not because the math was wrong. Because life happened.
What Actually Matters in This Decision
Forget the rate-of-return projections for a minute. Here's what you should actually be thinking about:
How much guaranteed income do you need to cover non-negotiable expenses?
If your pension (plus Social Security) covers your baseline costs, the conversation about the lump sum gets a lot easier. You're playing with house money at that point.
What happens to your spouse if you die first?
Run the numbers on survivor benefits. Really look at what your spouse's income picture becomes. This isn't about maximizing returns. It's about not creating a financial disaster during an emotional crisis.
How do you actually feel about market volatility?
Not how you think you should feel. How you actually feel when your account drops $200K in a month. If that keeps you up at night, no amount of "potential upside" is worth it.
What's your health situation?
If you have serious health concerns and aren't expected to live a long retirement, the math changes. If you're in great shape and have longevity in your family, the math changes.
The Framework I Use With Clients
I can’t tell you what to choose. But I can walk you through a framework that makes this decision clearer:
Step 1: Calculate your essential expenses – the things you can't cut even if you wanted to.
Step 2: Compare your guaranteed income sources (Social Security + pension) against those expenses.
Step 3: Stress-test the lump sum scenario – what happens if markets crash early? What happens if you live to 95? What happens if your health changes?
Step 4: Have the hard conversation with your spouse about survivor income.
Step 5: Choose the option that lets you sleep at night.
That last one matters more than most financial advisors admit.
The Bottom Line
Your pension isn't competing with the S&P 500. It's providing certainty in an uncertain world.
The people who make the best pension decisions aren't trying to optimize every dollar. They're building a retirement income plan that actually works for their specific life – their expenses, their health, their spouse's situation, their tolerance for risk.
This choice is permanent. You can't adjust it later. You can't change your mind when the market crashes or when your health changes.
So stop comparing your pension to market returns. Start comparing it to your actual life.
If you want to see the full breakdown of how to think through this decision step by step, head over to my website for the complete video walkthrough. I'll show you the exact questions to ask and the numbers to run before you make this choice.
Education only, not advice. Consult your professional(s).