A defined-benefit pension plan promises retirement income through a plan-defined payout, commonly requiring a choice between a lump sum and steady lifetime payments. The central planning question is how that choice balances income, longevity risk, inflation treatment, and personal circumstances. section 1.1.3 section 6.4
Evaluate the pension choice by considering:
- Lifetime payments reduce longevity risk by continuing if the retiree lives beyond life expectancy. section 1.3
- Pension payments typically lack inflation adjustments, so their purchasing power differs from inflation-adjusted benefits such as Social Security. section 6.4
- Analyze the alternatives with a customized lifecycle model rather than relying only on a break-even calculation. section 1.3 section 6.4
Lump sum or lifetime income
A retiree can adapt the same Python-based analysis used for Social Security to compare a pension lump sum with a steady lifetime-income stream, modifying the model for the pension’s payment and inflation rules. section 1.1.3 section 6.4
