The Southern Company: Lump-Sum vs Annuity and Rising Interest Rates

Healthcare Provider Update: The Southern Company's healthcare provider is generally managed through an employer-sponsored health plan, which typically relies on insurers such as Aetna or Cigna, although specific arrangements can vary. As we approach 2026, significant healthcare cost increases are anticipated due to a multitude of factors affecting the Affordable Care Act (ACA) marketplace. With some states projecting premium hikes of over 60%, the expiration of enhanced federal subsidies is expected to push monthly costs for many enrollees up by more than 75%. This unprecedented rise in premiums combined with ongoing inflation in medical costs, driven by higher hospital and drug prices, creates a complex financial landscape for consumers navigating their health insurance options in the coming year. Employers like The Southern Company may need to strategize effectively to mitigate the impact of these escalating costs on their employees' healthcare coverage and overall well-being. Click here to learn more

Lump Sum vs. Annuity

Retirees who are eligible for a pension are often offered the choice of whether to actually take the pension payments for life, or receive a lump-sum dollar amount for the “equivalent” value of the pension – with the idea that you could then take the money (rolling it over to an IRA), invest it, and generate your own cash flows by taking systematic withdrawals throughout retirement.

The upside of keeping the pension itself is that the payments are guaranteed to continue for life (at least to the extent that the pension plan itself remains in place and solvent and doesn’t default). Thus, whether you live 10, 20, or 30 (or more!) years in retirement, you don’t have to worry about the risk of outliving the money.

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By contrast, selecting the lump-sum gives you the potential to invest, earn more growth, and potentially generate even greater retirement cash flow. Secondly, if something happens to you, any unused account balance will be available to a surviving spouse or heirs. On the other hand, if you fail to invest the funds for sufficient growth, there’s a danger that the money could run out altogether, and that you may regret not having held onto the pension’s “income for life” guarantee.

Ultimately, though, whether it is really a “risk” to outlive the guaranteed lifetime payments that the pension offers, by taking a lump-sum, depends on what kind of return must be generated on that lump-sum to replicate the payments. After all, if the reality is that it would only take a return of 1% to 2% on that lump sum to create the same pension cash flows for a lifetime, there is little risk that you will outlive the lump-sum even if you withdraw from it for life(1). However, if the pension payments can only be replaced with a higher and much riskier rate of return, there’s also a greater risk those returns won’t manifest and you could run out of money.

Rising Interest Rates

In defined benefit plans, current and future retirees are offered a lump-sum payout or a lifetime monthly pension benefit. Often these plans have billions of dollars worth of unfunded pension liabilities, and in order to get the liability off the books, they pay the lump-sum.

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Depending on lifespan, the initial lump-sum is typically less money than regular pension payments over an entire retirement. However, if interest rates increase by 1% it could decrease the lump-sum offer by approximately 8-10%. Other factors such as income needs, need for survivor benefits, and tax liabilities often dictate the decision to take the lump-sum.