Changing A&D Jobs? What to Do With Your Old Pension (The Lump Sum vs. Annuity Decision)

You just accepted a new offer at a dynamic space-tech startup or a different Prime Contractor. You are going through the offboarding checklist: handing in your badge, returning the laptop, and rolling over your 401(k).

Then, you get a packet in the mail about your Defined Benefit Pension Plan.

If you are under 40, you might be surprised you even have a pension. While rare in the tech world, legacy A&D firms often still provide these benefits.

The packet usually offers you two choices:

1. The Annuity: Wait until age 65 to collect $600/month for life.
2. The Lump Sum: Take a one-time payout of $45,000 today.

When you look at the numbers, $600/month for life sounds like a lot more money than $45,000 once. But for a young professional, the "safe" option carries a different, often invisible threat: Inflation Risk.

Here is the math you need to run before you check the box.

The Invisible Enemy: Purchasing Power Risk

The annuity offer promises you a fixed paycheck starting at age 65. If you are 35 today, that is 30 years from now.

The problem? Inflation.

Most corporate pensions are not inflation-adjusted. That $600/month will still be $600/month in the year 2055.

• The Reality: At 3% historical inflation, $600 in 30 years will feel like ~$247 today.
• The Risk: You are locking in a payment that buys less and less groceries every single year of your retirement.

For a 60-year-old, a fixed annuity might make sense. For a 35-year-old, inflation is a massive threat to your wealth.

The Seed Money Concept (Lump Sum)

If you choose the Lump Sum, you are taking the Present Value of that future income stream today.

While $45,000 might not seem like enough to retire on, you have something the pension fund doesn't: Time.

If you roll that $45,000 into a Rollover IRA and invest it in a diversified portfolio:

• Compounding: You have 30 years for that capital to grow tax-deferred before you touch it.
• Control: If you die early, the remaining balance in an IRA goes to your spouse or kids. In many pension annuities, the payments simply stop when you die unless you pay extra for survivor benefits.

The Trade-Off: Taking the lump sum transfers the Investment Risk from the company to you. If the market crashes and stays down for 30 years, you could end up with less. But historically, over multi-decade periods, diversified markets have generally outpaced inflation—something a fixed, non-indexed pension cannot do.

The Tax Trap: Direct Rollover vs. The Check

If you decide to take the Lump Sum, how you take it matters.

The paperwork will ask if you want the money paid to you or an IRA.

• The Mistake: If you ask for the check to be mailed to you, the company is legally required to withhold 20% for federal taxes immediately. You then have 60 days to put the full amount (including the 20% they kept!) into an IRA to avoid penalties. It is a cash flow nightmare.
• The Fix: To avoid immediate taxes and penalties, most investors should choose a Direct Rollover (or Trustee-to-Trustee Transfer). The check is made out to "Custodian FBO [Your Name]" and sent directly to your new account. No withholding, no taxes, no penalties.

Why Companies Offer Buyouts

Why is your old employer offering you this cash? Are they being generous?

Likely not. They are de-risking.

Managing a pension fund is expensive for a company. They have to guess how long you will live and how the market will perform for the next 50 years. By writing you a check today, they get your liability off their books forever.

Sometimes, this alignment of interests works for everyone. They get a cleaner balance sheet; you get control of your capital.

Summary

If you are nearing retirement, a guaranteed pension check is a beautiful safety net. But if you are mid-career, a small frozen pension is often just an inflation casualty waiting to happen.

Don't auto-pilot this decision. Run the future value calculation.

If you need help comparing the Internal Rate of Return on your pension offer vs. a rollover, we can run the specific numbers during a Launch Pad planning session.