Lump Sum or Annuity? And the Income Floor That Ends the Worry

Two of the most consequential decisions a retiree ever makes are also two of the least practiced. You get one shot at each, the stakes are decades long, and nobody ever rehe­ars them with real money. RetIQ v7.33.0 adds a decision tool and an income-floor tool that let you run both of them with math instead of guesses.

Decision one: pension lump sum or lifetime annuity?

Every year, tens of thousands of people face a one-time choice: take a pension as a lump sum now, or as a guaranteed monthly check for life. There is no right answer in the abstract — it depends on three things you control: your life expectancy, the tax you’ll pay on each path, and what the lump sum would earn if you invested it.

RetIQ’s new Pension Decision card on the Pension tab turns that into a comparison. Enter the lump-sum offer, the annual annuity payment, the annuity’s COLA and start age, your plan end age, the return you expect on the lump sum, your tax rate, and the taxable percentages. RetIQ computes the after-tax present value of each option at your assumed return and tells you which is worth more — and the break-even age: the point where the annuity’s cumulative after-tax payments recover the lump sum.

The numbers matter. On a $500,000 buyout vs. a $30,000-a-year annuity at a 22% tax rate and a 5% assumed return, the lump sum wins on present value — but if you live past roughly age 81, the annuity’s cumulative payments have already overtaken it, and every year after is the annuity’s. That single number — where the two lines cross — is the whole decision in one sentence. (And if the buyout is small enough, or your taxes low enough, the annuity wins from the start. The card shows you which.)

When you’ve decided, one click applies it: Take the Annuity writes a pension entry into your plan; Take the Lump Sum adds the buyout as a taxable cash event. Set the lump-sum taxable percentage to 0% if you’re rolling it into an IRA instead of cashing it out. Both remain fully editable afterward.

Decision two: buy an income floor?

The second tool answers the worry that quietly drives most retirement planning: what if the portfolio runs out before I do? The standard institutional answer — the one pension funds and endowments use — is a guaranteed income floor: a stream of lifetime income that covers essential expenses, with the portfolio handling everything on top.

A Single Premium Immediate Annuity (SPIA) is how individuals buy that floor. You pay an insurance company a lump sum today; it pays you a fixed amount for life. The trade is real — you give up the lump sum’s growth and liquidity — but what you buy is the one asset no portfolio can produce: income that cannot run out, no matter how the market behaves or how long you live.

RetIQ’s new Immediate Annuity card makes the trade concrete. Enter your premium and your insurer’s actual quote (a payout rate, or a direct annual income), choose an optional COLA, a survivor option (life-only, or joint 50%/100%), and how much of each payment is taxable. RetIQ shows the annual income you’d receive and, with one click, Purchase reduces the funding account by the premium and adds the stream to your plan — so you can see immediately what a lifetime income floor does to your Monte Carlo success rate, your withdrawal needs, and your tax picture.

Two honest caveats, because the tools are designed to be honest. First, both are decision tools at your assumed rates — the comparison uses the return, tax rate, and life expectancy you enter, not a prescribed answer. If you assume a high return on the lump sum, it wins; assume a low one, and the annuity wins. That’s the point: the decision genuinely depends on your numbers, and now you can see exactly how. Second, the taxable portion of SPIA payments comes from the §72(b) exclusion ratio (premium ÷ expected payments) — enter your insurer’s figure, or 100% for a qualified annuity.

Why these two belong together

The pension decision and the income floor are the same question from two directions: do I want guaranteed income, or the flexibility of a lump sum? Most retirees end up with a mix — a pension taken as an annuity for the basics, a floor layered under a portfolio for everything else. RetIQ lets you model both sides of that mix, apply your choices, and watch the whole plan respond. That’s the difference between guessing at retirement and planning it.