There is no universal answer, and anyone who gives you one without asking about your health, your spouse and your other income has not earned your trust.
What I can give you is the way to decide. Take your time with it. This choice is usually permanent.
What each one gives you
The federal agency that insures private pensions, the PBGC, sets out both sides.
Monthly payments give you a steady income for the rest of your life, like keeping part of your paycheck. You may be able to continue an income to your spouse after you die. The risks: less flexibility, and depending on the option you choose, payments may not continue to your survivors.
A lump sum gives you control. You can pay off large debts, and whatever you do not spend can be left to your family. The risks: you may outlive the money, and managing it to produce an income becomes your responsibility.
Read that last part again. With a lump sum, the job of making the money last thirty years moves from the pension plan to you.
Seven factors to weigh
These are the PBGC’s own list.
Your health, and your spouse’s. A long-lived family makes lifetime income more valuable.
Your investment skills, and how they may change as you age. The person managing the money at 85 will not be the person you are at 62.
Your living expenses, now and later.
Your savings. If you already have a large portfolio, a guaranteed paycheck balances it.
Other steady income, such as Social Security or another pension.
Your debts.
Taxes on each option.
A simple way to compare them
Divide one year of pension payments by the lump sum.
If the pension pays $24,000 a year and the lump sum is $400,000, that is 6%. Those are example numbers.
Then ask: could you take 6% a year from $400,000, for life, and be confident it would last? For most people that is a high rate to draw from a portfolio for thirty years. In that example, the monthly payments are doing something hard to copy.
If the figure were 3% or 4%, the lump sum would look much stronger.
It is a rough test, not a verdict. It does show you what the pension is really offering.
The lump sum looks bigger. The monthly check lasts longer than you can plan for.
Do not skip the spouse question
If you choose monthly payments, you will usually be offered a version that continues to your spouse after your death, in exchange for a smaller check now. For many couples, that is the single most important box on the form. Decide it together.
It may not be all or nothing
Some plans let you take part as a lump sum and part as monthly income. The PBGC says to check with your plan administrator. If your plan allows it, a split can cover your basic costs for life and still leave you something flexible.
A caution about advice
An advisor usually earns nothing if you choose the monthly pension, and earns a yearly fee if you take the lump sum and hand it over to manage. That includes advisors like me.
It does not mean a lump sum recommendation is wrong. It means you should ask directly: “How are you paid under each choice?” And be especially careful if the plan is to move the lump sum into an annuity or another product with a commission.
If you take the lump sum, have it sent directly to an IRA so it is not taxed all at once.
Related questions: should I roll my 401(k) into an annuity, should I roll my 401(k) into an IRA, is my 401(k) safe in a crash and how to check if your advisor is a fiduciary.
One question for this week: what are your basic monthly costs, and how much of that would Social Security plus the pension cover? If the answer is “all of it,” that tells you what the pension is worth to you.
As always, if you want to talk any of this through, the door is open. Genti