Increasingly complex markets and potential future instability as business models change are both weighing heavily on the minds of employees and employers alike. One way that employers are handling this is to offer a lump-sum payout to their retirees in lieu of monthly pension payments. While it’s common to offer these options to currently pensioned, retired employees, more companies are offering this option to active employees as well.
Should you consider a lump sum or monthly pension?
Why would a company offer this option? For many reasons, but the primary ones are fairly simple:
– By getting rid of that pension, the company’s future liability goes down
– In some cases, offering a buyout removes the necessity to continue employer-based retiree health or life insurance, instead putting the onus on the employee to get their own
For you as an employee, there are merits to both keeping your monthly pension intact and also to getting a lump-sum payout. We will be discussing the benefits and downsides to both, and how you can use either to fund your retirement in different ways.
Reasons to consider a lump sum payout of your pension
The way this payout would work is that the company determines the value of your retirement fund as it currently stands, and then modify that amount based on factors such as your age, health and anticipated age of retirement. The final number is what they will offer you as a lump sum, and what you can take instead of those monthly payments into retirement and beyond.
This choice gives you a lot of money all at once and gives you the freedom to use it however you want; buy some rental property, invest it in the market or pay off current debt, giving you more earning potential now. While all of these options are attractive, there are potential downsides to this option:
– Just like winning the lottery, many people might be prone to squandering such a large amount of money given to them all at once. Having a financial planner, investment broker and insurance advisor in your corner are great ways to smartly use that money and ensure you’ll have even more funds in your retirement.
– In the event you take the money directly, it will be taxed just like any other income source. A better choice might be to roll it into your IRA.
– By taking the money out of a safe-but-slow growing retirement plan like a pension, you subject it to the whims of the market (assuming you invest it). While you can expertly turn a large lump sum payment into even more money, you can just as quickly lose it, so again, having expert advice is critical so you don’t lose your retirement.
Reasons to consider keeping your monthly pension
Monthly annuity payments are safe and you can plan around them very effectively. If your pension is for $1000 a month for life, then that’s pretty concrete. Additionally, in many cases your spouse can continue to draw from your pension after you pass away. Finally, many companies also provide some manner of insurance benefit for pensioned employees, which can mitigate or eliminate the cost of insurance.
There are issues with this choice as well. While it’s safe, it’s also not any protection against inflation, as your employer will not have any reason to increase your pension. Additionally:
– If your company goes under and cannot pay your pension – something that has happened many times in high profile cases – you will largely be out of luck. While there is the Pension Benefit Guaranty Corporation that federally protects pensions, they only cover up to around $5800 per month, so if your pension was much higher than this and the company folds, you’re losing a lot of money per month.
– While there are companies out there that will buy your annuity and offer you a lump sum, it will typically be dramatically less than your company’s offer. If you end up needing a large sum of cash and have to use one of those annuity buyouts, it will be a large loss.
How do you decide?
It’s honestly up to you and your situations to decide if you accept the buyout or not. If you need a lot of cash immediately for fixing up your home, buying a new one or you feel you can better invest your pension, than it’s probably a good idea to accept the lump sum. If you’re close to or already in retirement and you don’t want to mess with all of the investing, diversifying and everything else that comes with that type of a choice, then keep the money right where it is and enjoy the security of monthly, reliable payouts.
If you’re considering a lump sum buyout, it would be a good time to get a financial advisor on the phone and discuss your options. They can look at your monthly expenses, your income streams like social security, work in retirement and retirement plans like 401ks and figure out what makes the most sense.
Additionally, having an insurance expert is a good way to figure out if you’ve got enough coverage and if your current income will cover you while leaving enough left over for you to actually enjoy your golden years. Contact a professional today and make confident retirement choices that will keep you and your family financially covered well into the future.