The word “lump” carries enough negative connotations that it comes as no surprise when its presence in a conversation about a retiree's future makes all involved uncomfortable.

But there's no reason for discomfort on the part of the client or the advisor. When a retiring client's employer presents him with a choice between a monthly pension check and a lump-sum payment, the choice is usually a simple one. Happily, the move that is typically best for the client — accepting the lump — also usually ends up being the most lucrative one for the advisor.

With at least 45 million current or future retirees with pension benefits from private corporations, the issue promises to be an important one for some time to come. Here are eight reasons to advise the client to accept the lump sum.

  1. “Safety” is a relative term.

    How reliable is that check-a-month payment stream from your client's former employer? Very — unless, of course, the company is subject to the natural laws of capitalism. Then the retirees might want to pick up the CFA designation in their newly found free time. Ask any retired steelworker or airline pilot, and they'll tell you they now know more about their company's finances than they ever wanted to. It's true that the Pension Benefit Guaranty Corporation (PBGC) — a government agency that ensures pensioners get what they were promised — guarantees many pension benefits. But many experts believe that in a few years the PBGC may go the way of S&Ls. The nonpartisan Center on Federal Financial Institutions contends that, barring any major changes, the PBGC will run out of money in about 15 years. Even if the PBGC remains solvent enough to pay out your clients' benefits, the maximum amount covered is currently $3,698 per month (and the amount is lower if the pensioner retired before turning 65).

  2. Lack of interest.

    Most pension payments are based on a fixed interest rate — maybe 5 percent or so right now. Ask your clients if they think rates are likely to be lower or higher in the future. After they say “higher,” ask them if they think it's a good time to lock in a rate on what could end up being a 20- or 30-year investment proposition.

    Besides, it's no coincidence that 5 percent is also the rough equivalent of the long-term Treasury yield. If you can't exceed the risk-free rate of return on your client's long-term investments, well, uh … what exactly is it that you do?

  3. “Live long” and “prosper” are mutually exclusive.

    The good news is you can do better than 5 percent for your clients. The bad news is you must. Two of the biggest expenditure categories for retirees are health care costs and property taxes — both of which have rocketed up 10 percent or more per year in recent times. It's not a problem if your clients cleverly die a few years after they receive their first pension check. But say a 60-year-old couple is spending $4,000 a month in retirement, receiving $2,000 a month in a “guaranteed”-for-life pension, and currently allocates $800 per month for property taxes and out-of-pocket medical expenses. If the current inflation rates continue, by the time they hit 70, these two categories alone could eat up all of their pension check.

  4. But what about the children?

    If mom and dad choose the periodic payment instead of the lump sum, they are likely to take the option that gives them the biggest monthly check possible. But if the pension makes up the bulk of the retirees' net worth, a too-soon tragedy could leave little or nothing for their children and grandchildren. Calculate a break-even point for your clients, using a 0 percent annual return to be conservative. Show them that if they have the option of taking, say, $3,000 per month for the rest of their lives versus a $500,000 lump sum now, they'll have to survive for 14 years of payments before their heirs will come out ahead. If you can pick up just 4 percent per year on investing the lump sum, the beneficiary break-even point moves out to 20 years.

  5. Where's Waldo's pension?

    How many of your clients don't know they have retirement accounts with you? One or none seems to be a likely answer. But apparently companies and government agencies aren't quite as good as you are at making people aware of their wealth. Last year, the PBGC admitted they couldn't find 22,000 individuals who were owed pension benefits ranging from $1 to $295,298 in value. And these are just the people who were beneficiaries of terminated pension plans. Rolling a lump sum over to you will make it less likely that your clients' money disappears down a bureaucratic sinkhole.

  6. Uncle Sam wants you — to take the pension option.

    That predictable, constant pension check could cost your clients thousands of dollars in income taxes. If they were to instead take a lump sum payment, employing a “peak and valley” IRA-withdrawal strategy (alternating between high and low payment amounts each year) could give your clients the net income they need, while allowing them to maximize tax loopholes. In the peak years, they save taxes by bunching and itemizing their deductions. In the “valley” years, they can use the standard deduction to avoid subjecting their Social Security payments to taxation.

  7. Anything they can do, you can do better.

    Retirees opting for the pension payments usually say they like the predictability of the monthly check and that they don't have to manage the money. But even those supposed features can be duplicated in your office. You can set up a monthly deposit of a predetermined — yet flexible — amount to be wired into your clients' checking accounts. And by placing the lump sum with you, they now have the option of picking from thousands of mutual fund and separate account managers, rather than just the few who were chosen by their company's pension board.

  8. How good is your crystal ball?

    That monthly pension check should cover every financial drama your clients face — as long as the cost isn't more than a few thousand dollars. But if they have any positive or negative surprises that require a five- or six-figure solution, being able to tap into their lump sum means they won't have to go hat-in-hand to the local bank.

If these arguments aren't enough to sway your clients, you still have one last chance to work with them. Offer to scout out the payment options of the immediate annuities at your disposal. You can customize a payment plan to fit the clients' needs, and diversify the money among several different insurers.

Writer's BIO: Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future. kevinmckinley.com