What’s Better For Your Retirement?

The U.S. Office of Personnel Management (OPM) recently emailed over 2 million federal employees an offer to pay eight months of salary in exchange for resignation. Initiated by the newly launched “Department of Government Efficiency” (DOGE), roughly 75,000 employees accepted the deal. The change underscores a broader shift of large institutions curtailing their workforces. This trend could have significant implications for retirement planning for many Americans.­­

Other prominent examples of 2025 layoffs include:

These recent cuts add more data points to what seems to be a pattern. In 2019, multinational industrial and technology company General Electric offered buyouts to nearly 100,000 former employees who had yet to begin receiving pension payments. Microsoft announced its biggest-ever job cuts in 2014, affecting 18,000 employees. Financial services juggernaut Citigroup announced plans to cut more than 50,000 jobs due to the financial crisis in 2008 after having already cut 23,000 earlier in the year.

The layoff era is replete with inelegant euphemisms like “surplussing” or “rightsizing.” Some even chose “redeployment,” apparently hoping the medicine would go down easier with a spoonful of linguistic sugar.

Regardless of how the challenge is presented, deciding on the preferred method of payout can be difficult for present or future retirees. Is taking a lump sum payout or receiving a monthly pension better? No one wants to get it wrong and lose out on hard-earned resources.

There is no one-size-fits-all answer, but a simple rule of thumb called the 6% Test can help retirees make an informed decision.

The 6% Test

Consider the 6% Test as a quick and easy gauge to determine whether a lump sum or a pension is preferable in your financial situation. To calculate pension percentage, use the single life payout option to find your monthly pension amount, then multiply it by 12 to calculate the annual pension total. Divide that number by the lump sum offer to ascertain a percentage. If your monthly pension payout is 6% or higher, the monthly pension could be a solid option. If the monthly pension payout is less than 6%, the lump sum amount, which can be rolled into a retirement account, may offer greater financial flexibility.

Real World Scenarios

^{Scenario 1: A Strong Pension Offer}

• Monthly pension: $1,500
• Lump sum offer: $180,000
• Formula: ($1,500 x 12) ÷ $180,000 = 10%
• Since 10% is greater than 6%, the pension offer provides a high enough return to potentially exceed the lump sum option.

Scenario 2: A Weaker Pension Offer

• Monthly pension: $500
• Lump sum offer: $200,000
• Formula: ($500 x 12) ÷ $200,000 = 3%
• Since 3% is less than 6%, the lump sum is typically a more potent choice than the pension payout.

Additional Factors To Consider

The 6% Test is a constructive first step, but a few more aspects need to be incorporated before making the final decision.

• Retirement Timeline
  • If your pension payments don’t start immediately, assess if there are sufficient assets to cover living expenses in the meantime. This would include determining your number of income streams. If few, a monthly pension amount could add comfort and financial security during retirement.
• The Need For A Lump Sum In Case Of Emergencies
  • Do you have a strong emergency fund or other substantial liquid investments, such as 401(k) funds or a brokerage account? If not, a lump sum could provide liquidity for unexpected expenses.
• Projected Longevity
  • No one has a crystal ball, but if you’re in good health and can reasonably expect to live well into your 80s or 90s, a pension can help provide lifetime financial security. However, the lump sum might be preferable if family history suggests something shorter.

• Pension Survivor Benefits
  • If married, does your pension offer a spousal survivor benefit? If so, determine how much. A 100% or 50% allotment would reduce the amount of the monthly pension payment to account for that future spousal payout.
  • Will your pension continue to pay benefits to your family after your death? Typically, pensions only allow a spouse to be a beneficiary, whereas rolling the funds into a retirement account would allow you to designate anyone as a beneficiary, providing greater flexibility for estate planning.
• The Impact Of Inflation
  • Most pensions do not include a cost-of-living adjustment, or COLA. This means that while the pension may seem sufficient today, its purchasing power will decline. A lump sum provides the opportunity to invest funds, potentially earning returns that keep pace with or exceed inflation. Consider how your expenses might increase over 10, 20, or 30 years and whether a static pension payment will be enough to cover them.
• The Financial Strength Of The Employer
  • Is your pension backed by the Pension Benefit Guaranty Corporation, or PBGC? If not, or if your employer, company, or agency appears financially unstable, a lump sum might be a safer bet.

• Today vs. Tomorrow
  • Taking the lump sum means immediate control over the money, but that’s only beneficial with responsible investing. The monthly pension removes opportunity for growth, but it instead offers the comfort of a steady and dependable paycheck for life.
  • It should be noted that monthly pension payments will be taxable, depending on your overall tax bracket, as soon as they begin. A lump sum rollover could be tax-deferred until you start withdrawing the funds if you roll that lump sum into a traditional IRA or another qualified plan. You may want to speak to a financial advisor to discuss the best options and fit for you.

Bottom Line

Deciding between a lump sum payout and a monthly pension is pivotal, but it doesn’t have to be overwhelming. Making the most effective choice depends on several factors that you can tackle one step at a time. Taking the 6% Test is a straightforward and reliable way to initiate the process and establish a baseline. From there, your personal financial needs, health, investment comfort, and pension stability should influence your choice.

The process can be just as practical for someone facing a pension buyout offer from an international conglomerate as it is for another at a family business. No matter how intimidating the prospect may seem at first, after running the numbers thoughtfully, analyzing your needs, and determining your goals, the answer will typically begin to reveal itself.

This publication is provided for informational purposes only and should not be regarded as personalized investment advice. Investors should seek advice from a qualified financial advisor about their specific situation prior to implementing an investment strategy. The information provided is not an offer or solicitation of any product or service. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and is not suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision you may make. Always consult with your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.