When a pension pays more than 7% of the lump sum each year, a 5% Treasury ladder faces a steeper climb than most retirees expect, and the trade-off lurking inside that gap can quietly reshape everything that heirs…
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A retired father has two options from his former employer’s retirement plan: a one-time payment of $410,000 or $2,600 per month for life. He prefers the lump sum and plans to buy Treasury bonds paying about 5 percent, live off the interest and leave the principal to his children. People receiving a traditional pension are constantly faced with this choice. With long-term returns hovering around 5%, the lump sum looks better today than it has in years.
A similar question arose The Clark Howard Podcast this spring. An auditor named Alex in Michigan had to choose between a flat fee of $58,000 and $411 per month. Councilor Wes Moss calculated that the pension paid about 8.5% of the lump sum each year. He called this rate “difficult to guarantee.”
A 7.6% payment versus 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 general rule: “If it’s 6% or less, stick to a flat amount.” Dad’s offer is way above that line.
The 5% Treasury bonds would pay about $20,500 per year on the entire lump sum. That’s about $1,708 a month, compared to $2,600 from the pension. A flat rate of 5% is also not offered every quarter. Recently, the 5-year Treasury yield was 4.8%, the 10-year 5.0% and the 20-year 5.3%. Earlier in October, the 10-year rate was at 5.2%. Each bond that matures later will be reinvested at the rates in effect at that time.
How long he will live solves the question
To get the same monthly income from Treasury bills, Dad would have to spend the principal. If he takes the annual pension amount of $410,000 with a 5% rate, the account dries up in about 22 years. For someone who retires at 65, this happens near the end of age 80, and if they live longer, the pension continues to be paid even after the bond portfolio is gone. If he dies earlier, the lump sum leaves heirs with money that a single lifetime pension would not leave them.
The problem is that neither option keeps pace with inflation. A pension generally does not have a cost-of-living increase unless the plan document provides for one, and a Treasury coupon never changes. With an inflation rate of 3%, $2,600 will only buy what $1,440 would buy today, after 20 years. The BLS search index for Americans 62 and older increased 3.6% over the past year. Social Security, which will increase by 3.6% in 2027, remains the inflation-adjusted portion of its income.
Two paths, and one of them usually comes first
Take the monthly pension
For retirees in average or better health, this path returns more per dollar, eliminates reinvestment risk, and leaves no portfolio to manage at age 85. Married retirees often take a close look at a surviving spouse option. Moss emphasized choosing survivor coverage or a guarantee for a certain period of time so that the plan does not keep the money after an untimely death. Pension checks are taxed as ordinary income. In 2026, a single filer pays 22% on taxable income above $50,400.
Turn the lump sum into an IRA and build a cash ladder
This approach benefits a smaller group: people with health problems, people whose Social Security and savings already cover their expenses, and people whose primary goal is to leave a legacy. A direct rollover into an IRA keeps the entire amount tax-free.
Cashing out instead triggers a withholding and makes the entire balance taxable that year. Once the money is in an IRA, required minimum distributions later apply, and missing a distribution results in a 25% excise tax under 26 USC § 4974(a). People who choose this route generally do so to conserve capital, 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 is more than 7% and Dad expects to live into his late 80s, Treasury bonds yielding around 5% are unlikely to be up to the task. If he still wants Treasury bonds, he can buy them with other savings and benefit from his retirement as well.
The most common mistake here is to compare the $2,600 per month from the pension with a Treasury plan that quietly assumes it will spend the capital while leaving it intact for heirs. He can do either with the lump sum. Spending on interest alone means living on about $1,708 per month. If the retirement plan offers multiple survivor percentages for a spouse, the choice is permanent, and an advisor who only charges fees and can model each option based on the couple’s age can make a real difference.
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