Should I Cash Out My Pension to Buy an Annuity?

May 20, 2023


As with some of my weekly newsletters, my topic of discussion comes from a conversation I had the previous week.

I had the pleasure of speaking with a wonderful lady a few days ago about the ATLAS Annuity Strategy.  During our conversation, she asked me point blank, “Should I take the lump sum from my pension and fund an annuity with you, or take the guaranteed monthly income?”

My answer may surprise you because it was a resounding, “NO!  Take the income!”

Even though it would benefit me personally if someone made the decision to take the lump sum option and fund an Income Annuity, 999 times out of 1000, I would not recommend it.

Here’s why:

  1. Defined Benefit Pensions Are One of the Greatest Retirement Benefits Offered.

Less than 25% of American workers still have them.  In the early 1980’s shortly after the 401(k) was voted into the IRS tax code, the vast majority of American workers had a Defined Benefit Pension.  It wasn’t until corporations figured out that they could exploit this new tax law by convincing their employees that having a 401(k) and “investing in the market” would benefit them more so they could live like the rich executives that run the company they work for.

Little did they know that the rich executives were keeping their defined benefit pensions and that the 401(k) was meant as a tax shelter for them to defer the taxes on their giant bonuses!

And what has happened since?  Well, the average guy has gotten slaughtered in the market, and due to stagnant wages and inflation, the average worker cannot set enough aside to save for a comfortable retirement.  And with the loss of the Defined Benefit pension, the only safety net they have is Social Security.

The other side of the coin is that a lot of Defined Pension Plans were mismanaged and future returns were grossly overestimated.  Mix in those low returns and the fact people are living a lot longer and you have a recipe for disaster.  None of which is the fault of the people that paid into them for decades!

I’m getting pissed just writing this!


  1. Defined Benefit Pensions Have a Higher Payout Rate than Income Annuities.

What does that mean?  Everything in retirement planning actually revolves around payout rates, not interest returns.  In the early 90s, William Bengen ran thousands of simulations analyzing returns from the S&P 500 going back to 1926 that became known as the Monte Carlo simulation.  What he discovered was to have a relatively high chance of your retirement savings lasting 30 years, you could only withdraw 4% of your total savings.

That was 30 years ago.  Today, that withdrawal rate is closer to 3% due to volatile markets and historically low-interest rates on fixed-income products like bonds and T-Bills (2022 & 2023 being the exception).  So, for every $100,000 you have saved for retirement, you can only withdraw $3,000 before taxes, and that still does not guarantee that you won’t run out of money.

Now, I can beat that plan all day long with an Income Annuity.  For instance, right now a 65-year-old couple can get a 6.6% payout rate with an A Rated company.  And that income would be guaranteed for both of them, no matter how long they live.

It has been my experience that most Defined Benefit pensions have an 8% payout rate or higher.  And that income is also guaranteed no matter how long you live.  Sometimes there are some concessions if you do not want the surviving spouse to take a reduction in income, but for the most part that is going to be about average.

There is nowhere you can take that money and get a guaranteed lifetime payout rate like that!  The only exception would be if that same couple contacted me at age 62 and we could defer that income for 3 years.  Then I could match the guaranteed pension.  But most employers will not give you the option to take a lump sum from a Defined Benefit while you’re still employed.


  1. The Pension Is for You, Not Your Kids.

One of the consistent reasons I hear that people want to surrender their Defined Benefit and take the lump sum is that there is no death benefit if both spouses pass away early.

This was the conversation I had this week.  I always try to be honest, sometimes to a fault, and I expressed that “the pension is for you to survive on while you’re retired, not to leave to your kids.”

Let your kids make their own money.  You have already paid your dues by raising them.  What I have seen happen is that people will live in near poverty so they can leave money behind for their kids when they die.  And what do the kids do once they get the money?  They spend it on all the stuff the people who earned it should’ve been doing!  Taking vacations, buying boats, and joining country clubs. 

If leaving money behind for your kids is a priority, the smart strategy is to leverage your money by setting a specific amount aside to buy life insurance for pennies on the dollar.  And if you cannot qualify for life insurance, then you can put the money in a growth annuity that has a bonus towards the death benefit.

Luckily, I think I will be able to help make this wonderful lady whole again and get her back to the original income she was expecting from her pension by using the ATLAS Annuity Strategy.


When Would I Recommend Taking the Lump Sum?

The only time I could see myself advising someone to take the lump sum would be if we could verify that the pension system is in a catastrophic financial state and could fail at some point.  But even with union pensions that are not in the best shape financially, most likely the federal government will bail them out.

This is a very personal subject to me because I had a Defined Benefit Pension, and it was changed to a Defined Contribution in 2008.  It’s literally the whole reason I started ATLAS.  I spent 7 years researching financial products and strategies to find a way to replace it, and the only thing that comes close to replicating a Defined Benefit Pension is an Income Annuity.

So, if you have a Defined Benefit Pension, keep it! 

The other question I get on a regular basis from people with Defined Benefit Pensions is, “Do I need an annuity if I already have a guaranteed income?”

I’m glad you asked!  Because I actually made a video called, “I Have a Pension.  Do I Need an Annuity?”  You can watch this video along with all my other great videos by clicking here.

As always, please don’t hesitate to reach out by booking a short phone call to get your questions answered by clicking the “Schedule a Call” button in the top right corner of the screen.

I hope this finds you well!

All the best,


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