Pension buyouts: Carefully consider all the factors

Kim Last
Kim Last

If you get a pension buyout offer from your long-time employer, you might be more than a little anxious. Does that lump sum constitute a good deal for you or the corporation or organization providing retirement income?

With General Motors and Ford offering lump sum payments to tens of thousands of former workers, pension buyouts have received more scrutiny in the media. Expect to see more of them. In one poll of more than 500 human resources professionals, Aon Hewitt found that 35 percent of respondents intended to offer lump sums to vested pension participants.

When GM ended its salaried retirement program, salaried retirees and their surviving spouses faced a choice: take a lump sum or receive a new form of monthly benefits courtesy of an insurance company. GM retirees who rejected the lump-sum offer realized their pension plan was being taken over by a major U.S. insurer. In the process, GM retirees lost pension protection coverage afforded through the Pension Benefit Guaranty Corp., an independent agency of the federal government that provides insurance for a majority of traditional private-sector pension plans. Their pensions are now insured by State Guaranty Funds.

Ford subsequently announced it would offer its salaried retirees the option of a lump-sum pension payment instead of monthly payments.

Your decision to reject or accept a buyout can only be made after considering some key variables — and consulting with a financial professional you know and trust.

How large is your buyout offer? Stack it up against the estimated total pension payments you think you’ll receive over your lifetime. Run some numbers and weigh that lump-sum offer against 20, 30 or 40 years of accumulated pension checks.

How long do you think you’ll live? If your health is poor, the lump sum might be a better choice. You could access money you need or want now.

If you anticipate a long retirement, though, accepting a buyout could be risky. What if you spend or outlive that money? Consistent, lifelong monthly income is hard to abandon. Also, you might have set up a joint-and-survivor pension to provide your spouse with income after you’re gone. This is another factor that could prompt you to reject a buyout.

Can you handle the taxes from taking the lump sum? The IRS considers a lump-sum pension payout taxable income. By rolling over the lump sum into an IRA or other qualified retirement account, you won’t face the income taxes resulting from distribution of that money.

What kind of return can you get investing the money? Can you invest a lump sum in such a way it grows faster than inflation? Monthly pension payments aren’t usually inflation-indexed. Consequently, investing your buyout potentially could generate greater retirement savings or income for you in the long run.

Who will help you invest a lump sum? Pension funds are overseen by professional money managers. Are you one of those? If not, seek advice from an investment professional if you want to grow that money.

Consider also that you could lose money as a result of investing. You could see that lump sum diminish while, presumably, your fixed monthly pension payments won’t.

How long might that lump sum last? A lump sum is all too easily spent.

Examples abound of lottery winners and lawsuit plaintiffs who’ve exhausted six- and even seven-figure amounts in remarkably short times.

Monthly pension payments help you avoid that possibility.

Will a buyout change your lifestyle? Sometimes a “windfall” can subtly alter people’s financial outlooks — they live it up, only to suffer financial regrets later. Even if your lifestyle won’t change in getting a lump sum, you still should develop a long-term strategy to make the money last across the perceived length of your retirement.

If you elect to take a pension buyout, you can’t take that decision back. So the choice must be scrutinized, preferably with the advice of a financial professional aware of the potential upsides and downsides.

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