Q: I have a small pension with a department store that I worked at part-time. There are several payment options. For example one is a single life annuity of $82.27 or a lump sum payment of $10,701.68. Generally the monthly payments would be the best choice; however, I do have a concern because this department store has been sold and I’m not sure how this affects this my pension. This is not a lot of money but I can’t seem to feel comfortable about a decision.
A: Choosing between a lump sum and a single life annuity is fully dependent upon every individual’s unique situation based on various factors such as age, life expectancy, and expenses. However, to maximize your pension our general rule of thumb is that if the (Monthly Payments x 12)/The Lump Sum is greater than 6%, then it is best to choose the annuity. In your situation ($82.27 x 12) / $10,701.68 = 9.2%, therefore the formula tells to take the annuity in order to maximize your pension. Although, the maximum amount isn’t always the optimal solution for everyone, so it fully depends on which option makes sense for you.
