Should you accept a huge chunk of cash to give up a lifetime pension from your employer? Whether still working or retired, many of you will have to decide that in the wake of a recent policy decision by the federal government. Four years ago, pension-buyout offers slowed to a trickle as the Obama-era Treasury Department announced it was considering prohibiting companies from offering certain lump-sum buyouts in order to protect retirees from spending the money too fast or investing poorly. But this past March, the Treasury quietly backtracked on the proposal and buyout offers now are expected to pick up steam. How to decide…
You might consider the lump sum if…
- You are in very poor health and/or have a short life expectancy.
- You are wealthy enough that you don’t need the security of lifetime guaranteed income from your pension and can afford to take the risks involved in investing on your own.
Choose the steady lifetime payments if…
- You don’t think you’re up to the investment challenge of generating at least 4% to 6% annually from your portfolio over several decades. A recent MetLife study found that 21% of lump-sum recipients spent their entire payouts within five-and-a-half years rather than investing wisely.
- You stand to lose valuable benefits from your pension that aren’t factored into a lump-sum payment, such as subsidies for early retirement and spousal benefits. Important: Some retirees fear their company could go bankrupt in the future, and they won’t get their pension payments. That’s unlikely, since most company pension plans are backed by a federal pension insurance agency that guarantees payments up to about $67,000 annually, although that cap varies by the age at which you retire.
