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"Thinking is the hardest work there is, which is probably the reason so few engage in it."
— Henry Ford
The major risk in taking the lump sum is that you lose that lifetime income guarantee—the check that arrives every month, like clockwork. This can be offset if you take a portion of the lump sum and buy an annuity with a similar income guarantee, providing predictable monthly income on that piece of your retirement.
That's why many people use what we call a “best of both worlds” approach. Using our running million-dollar example: you might roll the entire $1 million into an IRA, then take half—$500,000—and put it into an annuity where you receive an income guarantee. You can rely on that income, month after month, for the rest of your life, while still having control over the other $500,000.
Understanding Annuity Types
When it comes to different types of annuities, it's similar to types of cars. There are sports cars, SUVs, luxury cars, fuel-efficient cars. With annuities, there are just as many options, if not more. Simple ones, complicated ones, safe ones, risky ones, income-oriented, immediate, deferred, and on and on.
Just as you can add features to a car—sunroof, technology package—you can add features to an annuity. Lifetime income riders, healthcare features, increasing-payment options. Each adds cost; each adds flexibility. We'll go deeper on annuity types in Chapter 10.
One major misconception is that annuities always require you to give up access to your principal. That's only true if you annuitize the contract—meaning you elect lifetime income payments in exchange for the principal. Many people don't want this, and there's a good chance you don't either if you're taking the lump sum. After all, your pension would have acted like an annuitized annuity if you took the monthly payments.
This is why annuity companies developed income riders, which allow you to take lifetime income without having to annuitize the underlying contract. When dealing with pension money, we tend to prefer the safer, fixed vehicles, which don't participate in market losses.
Comparing the Two Choices
Let's compare the payout rate from your pension against the lump sum. Say you have a $1 million lump sum versus a payout of $6,000 per month, or $72,000 per year. The cash flow payout rate on $1 million is 7.2%—that may be a higher guaranteed payout rate than you can get elsewhere.
The Lump Sum
Pros
- +Control and flexibility
- +Ability to pass on money to children/grandchildren (subject to 10-year rule)
- +Potential to do better by investing the money
Cons
- −You bear the investment risk
- −You forego the lifetime income guarantee
- −Potential early withdrawal penalty prior to age 59½
The Monthly Payments
Pros
- +Guaranteed lifetime income
- +Protect yourself from poor spending or investing decisions
Cons
- −No control over principal
- −Cannot pass on the asset to beneficiaries or charities
Four Planning Opportunities to Consider
#1: Retiring Prior to 59½
For those fortunate enough to retire at an early age, this opportunity presents some unique challenges. As we covered in Chapter 5, the Rule of 55 allows you to take penalty-free withdrawals from your 401(k)—not an IRA—if you separate from service in or after the year you turn 55. Many of our Big Three clients use this rule to bridge the gap between retirement and age 59½.
If you retire before age 55, the Rule of 55 doesn't apply. Withdrawals from either account will face a 10% early withdrawal penalty—unless they meet certain exclusions or unless you use the 72(t) provision.
The 72(t) Provision — Now More Flexible
Updated for SECURE 2.0
The 72(t) provision, formally called a Series of Substantially Equal Periodic Payments (SOSEPP), allows you to take penalty-free withdrawals from an IRA before age 59½. The dollar amount must meet one of three calculation methods and the payments must continue for at least five years or until you reach age 59½—whichever is longer.
What's Changed Since 2019:
SECURE 2.0 and subsequent IRS guidance modernized the 72(t) interest rate assumption. Previously, retirees were limited to roughly 120% of the mid-term applicable federal rate—which during low-rate years often came in around 2–4%. Today, retirees can use an interest rate up to 5%, even when prevailing market rates are lower. This can meaningfully expand the dollar amount you're allowed to withdraw each year—making the strategy far more practical.
This needs careful planning. Once set, you cannot change it without triggering retroactive penalties on every distribution you've already taken. Please consult with a tax professional before initiating a 72(t).
#2: Reducing Your Future Tax Liability
Let's look at Bob, an engineer who is retiring from GM at age 63. He has built up $900,000 in his 401(k), $100,000 in his bank account, and he has decided to take his pension lump sum for $1 million. Bob doesn't need a heck of a lot of money to live off of, with his wife still working, and he's also considering starting Social Security so he doesn't need to take income from his portfolio.
Bob is now in an interesting predicament, with 95% of his money in pre-tax status. You can bet your bottom dollar that Uncle Sam has his eyes on Bob.
The RMD Time Bomb
Under current law, Bob's required minimum distributions begin at age 73—not 70½, as older guidance stated. The SECURE Act of 2019 raised the RMD age to 72, and SECURE 2.0 raised it further to 73. (For autoworkers turning 74 after December 31, 2032, the age moves to 75.)
Say Bob's $1.9 million in pre-tax money grows by 5% annually over the next decade. By age 73, he'd be sitting on roughly $3.1 million—and his first RMD would be in the neighborhood of $117,000 per year, taxed entirely as ordinary income, regardless of whether he needs the money.
But Bob has options.
Roth Conversions: More Important Than Ever
Now that Bob is retired and his salary has fallen off, he has a multi-year opportunity to convert pre-tax IRA money to tax-free Roth IRA money. The mechanics are simple: you shift money from one account to the other, and you pay the tax bill in the year of the conversion—locking in today's tax rates on that money forever.
Why does this matter so much in 2026?
Tax rates today are historically low. Current ordinary income brackets remain among the most favorable in modern history.
The conversion window before RMDs is wider than it used to be. Pre-SECURE Act, Bob would have had until 70½. Now he has until 73.
Roth IRAs and (as of 2024) Roth 401(k)s have no RMDs during the original owner's lifetime.
The SECURE Act Killed the Stretch IRA
This changes everything for Bob's kids
Under the old rules, Bob's kids would inherit his IRA and “stretch” the required minimum distributions over their own life expectancies—sometimes 30 or 40 years. That's gone.
Under the SECURE Act of 2019—and the IRS final regulations issued in July 2024—most non-spouse beneficiaries are now subject to the 10-Year Rule: inherited traditional IRA assets must be fully distributed within 10 years of the original owner's death.
Old Rules
Each child takes small annual RMDs over 30+ years of life expectancy. Tax-friendly. Wealth-preserving.
New Rules
Each child must drain $1 million within 10 years, on top of their existing income. Could push them into 32%, 35%, or even 37% brackets.
The solution:A systematic Roth conversion plan during Bob's lifetime, paying tax at his own (lower) brackets, often makes far more sense than letting the IRA pile up. Bob's heirs receive Roth IRA money tax-free.
This isn't a strategy you want to figure out alone. The bracket math, state tax considerations, IRMAA (Medicare premium) thresholds, and timing of Social Security elections all interact. Please consult with appropriate tax and financial professionals prior to implementing a Roth Conversion strategy.
#3: Inflation
Let's go all the way back to the $64,000 Question reference we discussed in the introduction of this book.
When the phrase originated in 1942, $64,000 was a small fortune. In today's dollars (2026), that amount is worth over $1.3 million when adjusted for inflation.
The 2021–2023 Wake-Up Call
For most of the 2010s, U.S. inflation hovered around 2% annually. Then COVID happened.
9.1%
Peak CPI (June 2022)
~18%
Cumulative 2021-2023
~3%
Current (2025)
In just three years, retirees on fixed incomes lost nearly a fifth of their purchasing power. A retirement plan that doesn't account for inflation is a retirement plan that fails.
Inflation and Your Pension
Say you retired in the year 2000 with a $5,000-per-month pension. To match the same buying power today, you would need approximately $9,500 per month—nearly double. And almost no Big Three pensions include a Cost of Living Adjustment (COLA).
$5,000
Year 2000
$9,500
Equivalent in 2026
That's why we call inflation the silent killer. Your monthly check looks the same, but its purchasing power is constantly shrinking.
This is one of the underappreciated arguments for taking the lump sum: it gives you the ability to invest in assets that have historically outpaced inflation—equities, real estate, certain types of annuities with increasing-payment options. A monthly pension without a COLA is an income stream that gradually erodes.
#4: Long-Term Care Planning
We could spend an entire chapter on this—and we have. If you'd like a deeper read, our article “The Long-Term Care Conversation” walks through five funding strategies in detail.
The Numbers You Need to Know
70%
of people turning 65 will need long-term care
20%
will need care for 5+ years
$116K+
median annual cost (private room)
What Care Actually Costs in Michigan (2026)
The math: A $10,500/month nursing home cost over three years = over $375,000 for one stretch of care. Project that out two decades, and a similar stay could easily exceed $700,000.
Five Ways to Plan for Long-Term Care
i. Self-Insuring
Setting aside a bucket of money—typically $500,000+ in today's dollars—earmarked for potential long-term care costs. If you don't need it, it passes to your kids. Works best for retirees with $2–3 million+ in net worth.
ii. Traditional Long-Term Care Insurance
The classic "use it or lose it" model. You pay annual premiums; if you need care, the policy pays a daily or monthly benefit. The ideal time to buy is your late 50s or early 60s. Concerns: premiums aren't guaranteed and have historically risen sharply.
iii. Hybrid (Asset-Based) LTC Policies
Combine life insurance or an annuity with long-term care coverage. Make a lump-sum deposit ($100,000+); the deposit is leveraged into a much larger care benefit pool. If you never need care, your beneficiaries receive a death benefit. This category has grown enormously and is a popular strategy for many retirees.
iv. Riders on Annuities or Life Insurance
Less robust than dedicated hybrids, but useful in specific cases. Many annuities include chronic illness riders that allow you to accelerate benefits if a qualifying care event occurs. Since annuity riders typically have no underwriting, they can be attractive for those with pre-existing health issues.
v. Medicaid
The government safety net—covering more than 60% of nursing home residents. Medicaid is needs-based, meaning you must spend down most assets to qualify. There's a 5-year look-back on asset transfers. Most retirees view Medicaid as a worst-case backstop rather than a primary plan.
The Key Takeaway
Doing nothing is itself a plan—and usually a bad one. The earlier you have the conversation with your spouse, your kids, and your advisor, the more options you have.