May 19, 2026
According to the Pension Rights Center, only around 18% of Americans participate in a defined benefit pension plan at work. Defined benefit pension plans can be valuable because you typically get a set benefit guaranteed to last for the rest of your life.
However, pensions can be structured in different ways, and sometimes you have a choice about how to take the funds.
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For example, let's say that we have a worker named Alexander who has been at his job for 30 years and who has earned a generous pension. Alexander has plenty of money saved for retirement already in other accounts. He's retiring soon, and he can either take his pension as a lump sum that he can invest or he could accept regular monthly payments.
His pension does not offer cost-of-living adjustments (COLAs), and he thinks he can likely earn 6% per year if he takes the money and invests it. So, should he accept the monthly payments (which don't get bigger over time) or should he take the cash and invest?
Here are a few key questions Alexander should answer to decide.
What happens to the pension if he dies?
The first big question is what would happen to the pension if he dies.
If the pension payments stop right away, this is a strong reason to take the lump-sum payment and invest the money. Once he's received the funds and deposited them into an investment account, he has an asset he can leave to his spouse or whomever he likes.
If he doesn't take the money and sticks with monthly payments that stop when he dies, he's gambling on living a long time. If he retires and dies in two months or even in a couple of years, his family is left with nothing.
On the other hand, if the pension is guaranteed to pay out for a certain number of years, or if monthly payments transfer to his spouse after death, then the pension becomes more valuable because there's a reduced chance of benefits ending early if Alexander has bad luck.
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Plus, not only is it more likely that the pension will pay out for a long time, but the guaranteed monthly income coming from it could give those left behind more financial security.
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How confident is he as an investor?
The next big question is just how confident an investor Alexander is.
A pension is a sure thing, with no question that the money will keep coming. Investing creates added risk, and there's always a potential for losses.
There's also a sequence of returns risk to think about. If Alexander takes his lump sum payment, invests the money, and then the market goes down right away, he could see a big part of his retirement savings disappear. This makes it harder for his account to earn the desired returns, since he has a smaller balance he's working from.
If he needs to begin making withdrawals from the account during a downturn, Alexander would also lock in his losses, and recovering from the poor market timing could become even harder.
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If he has other income to live on and can avoid selling at a bad time, this could mitigate the risk. However, if he's rolling the pension money into an IRA, he has required minimum distributions to consider and will have to start taking money out at some point, whether he needs it or not.
Of course, he could also lose all of the money if he makes bad investments. But he can limit the likelihood of that happening by putting the pension money into ETFs tracking financial indexes, like an S&P fund that has a reliable history of strong returns.
How much of an impact will inflation have?
Finally, it's important to consider how big an impact inflation will have on the value of the pension.
The reality is, prices are rising all the time, and inflation has been surging in recent years, with prices up 3.8% year-over-year (not seasonally adjusted) according to Bureau of Labor Statistics data released May 12, 2026.
Even if inflation does cool and returns to the Federal Reserve's 2% target inflation rate, this still means Alexander's funds will lose buying power every year because his pension has no cost-of-living adjustment. And that small loss each year can add up to a lot over time.
Assuming just a 2% inflation rate, at the end of 20 years, you'd need $2,971.89 to buy the same amount as a $2,000 pension check would buy today. Without a COLA, Alexander wouldn't have that extra $971, so his pension money wouldn't go nearly as far.
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If he'd taken a lump sum and invested the money, his investment returns could help minimize the impact of inflation or even mitigate it entirely if his ROI is well above the inflation rate.
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Consider the trade-offs
Ultimately, Alexander will have to decide which risks he wants to take.
Getting the pension benefit each month protects against longevity risk, or the risk of outliving his savings, as well as against sequence of returns risk since he gets a guaranteed income from his pension for life. However, he does risk dying young and the value of the pension disappearing, and he'll lose ground due to inflation.
Taking the lump sum introduces the risk that he'll lose the money by investing it, and that his pension won't be a support source for life. Careful investing can limit this risk, especially if he doesn't need the money immediately due to his other savings, and he can just invest it and leave it to grow for a while.
Since there are pros and cons to both solutions, talking with a financial advisor may make sense so Alexander can work with a professional to think through the pros and cons and make the choice that's best for his needs.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Pension Rights Center (1); MIT Sloan School of Management (2); Internal Revenue Service (3); Internal Revenue Service (4); U.S. Bureau of Labor Statistics (5); Federal Reserve (6)
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
