Last time we talked about why you can’t peer into the future, to see what the value of your lump sum payout would be if you retired on a certain (post-November) date.

This time we’ll talk about why you might or might not want to cash out your pension, based on both financial mathematics, and behavior finance perspectives.

First, the math.

While the lump sum has to be actuarially identical to the annuity options, in reality they may be functionally very different values. For example, when I calculated my own non-COLA’d 50% joint/survivor annuity value, and compared it to my current lump sum payout today that I I would invest at an assumed conservative rate of return and then started drawing at the same age 65 that I’d have to begin taking my pension, looking from ages 65 onward there was never a time when the value of the pension was equal to or more valuable than the lump sum. In other words, it didn’t matter if I died at age 65.1, age 72, age 90, or age 100, or how old my husband lived to be, in every scenario that lump sum was more valuable to me than taking the lifetime stream of (technically identical but realistically shrinking in value) payments.

This requires me to do one thing very well over time, however, and that was to leave the investment alone to achieve market returns, something investors are known to be bad at.

It is also more vulnerable to the problem of sequence of return risk. If a rollercoaster doesn’t have much chance to get off the ground before undergoing its first 100′ drop, 50′ minus 100′ = a permanent problem. Whereas 200′-100’=still room for recovery.

Which brings us to the behavioral issues.

It’s hard for people emotionally to watch their financial capital, their investments, ride the roller coaster that is the daily, weekly, monthly, and yearly fluctuations of the market. And people in a panic often lock in their losses by pulling their money out of the market at exactly the wrong time.

So which one should I chose?

Before you make a choice, many factors should be considered, this is no one right answer and we don’t have a crystal ball. Many scenarios, including total portfolio value, expense ranges, lifetime duration ranges for each spouse separately and together, your past behavior during up and down markets, the percentage of your base needs (as well as what you’d like to be able to spend for a more comfortable lifestyle) that are covered by other income streams such as a COLA’d pension that your spouse might have and/or Social Security payments, and your vulnerability to sequence of return risks, should all be assessed before that decision is made, because it’s an irrevocable decision.

Have you thought about whether a lump sum cash out of your pension, vs annuity payment stream, might be a better fit for you?