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    How to Maximize your Pension Lump Sum or Lifetime Income

    Pension Lump sum or Lifetime income

    How to Maximize your pension:

    Lifetime income or Pension Lump Sum Payment which is best for you?

     Pension Buyouts: Lump ‘em or Leave ‘em?

    As the number of companies shedding their pension liabilities rises, employees are often left in a quandary on how to proceed.

    By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

    More and more companies are looking to shed their pension liabilities these days. I’ve recently seen big changes at Boeing, Honda and Toyota just to name a few in my area. Some organizations are encouraging workers to take their pensions in a lump sum while others are offloading their long-term management to annuity companies.

    Full disclosure, this issue hits particularly close to home because when the non-profit my husband works for shut down their pension plan, they presented him with two options; take the pension lump sum now or take a paltry lifetime income after retirement. In his case the choice was pretty clear. Retirement was decades away and rolling over the small pension lump sum to his existing IRA just seemed to be the easiest choice.  But for most people with more sizable pensions the choice isn’t always as cut and dry.  Keep reading to find out how to maximize your pension benefits with a pension lump sum rollover or lifetimes income.

    In it for the money

    Most companies would prefer to buy you out with a pension lump sum and be done with you. Mind you, they’re not trying to do you some big favor by giving you a chunk of money in return for you leaving the pension plan.  Rather, companies have to pay premiums to the Pension Benefit Guarantee Corporation for every person in their pension plan. Individually it’s not a huge number but can add up quite quickly for large companies.  Similarly, running the pension can be quite costly as well, beyond the cost of just funding the pension plan to provide the promised benefits.

    But whether you rollover your pension lump sum or hold off and take a lifetime income from the pension, this is not a decision to take lightly. Furthermore, it’s not unusual for workers to be given just 60 to 90 days to make this critical decision about their financial futures.  I know the siren’s call of the big dollar signs of a large pension lump sum may be too tempting to resist but I’m going to say STOP RIGHT THERE.

    Now is the time to sit down with a fiduciary financial planner pronto to go over your various options and make sure you are making the best choice for your specific situation, time frame and financial goals.

    What to know about what to do when

    If a pension lump sum “buyout” offer lands in your lap or you are just coming up on retirement, here’s what you and your trusted fiduciary financial planner need to discuss:

    • Run the numbers for both Pension Lump Sum and Pension income for Life Options

    I know, I know, math is so much fun.  But the bottom line is what will enable you to make a smart financial decision about what for many people is a major part of their retirement nest egg, if not their entire life savings. Basically you want to compare what type of compensation you would receive in the form of a pension lump sum to give up a lifetime of income from a pension. You may want to then compare what type of guaranteed income you may be able to generate on your own with that pension lump sum.

    Hypothetically Speaking?

    Hypothetically, let’s say your pension would pay $500 per month in 10 years and they offered you $100,000 now to take the lump sum.  Could you potentially grow that money enough to generate $500 per month for the rest of your life in 10 years? Assuming a 4% withdrawal rate, you’d only need the investment to grow at around 4.14% per year to “break even.”  Do you think you could potentially earn more than 4.14% ?  This isn’t an outrageous return. All the same it may depend how you invest and your risk tolerance. It is possible to find financial products out there with guarantees in this range or even higher.  Of course, those guarantees are subject to the claims paying ability of the party providing the guarantee, and generally come with additional fees or costs.

    The lower the returns needed to achieve similar incomes in retirement, the more appealing the lump sum may be.  As the rate of return needed goes up the risk of the lump also increases.   Many lump sums don’t provide the average worker enough money to replicate the pension payment without some risk in the stock market. Running the numbers will help uncover how much risk is needed.

    1. Beware the fine print- Pension Lump sum versus Pension Lifetime income

    “The large print giveth and the small print taketh away.”

    Tom Waits, Step Right Up

    For some pensions, both options lump sum and lifetime income may seem essentially equal.  In other plans, the difference may be quite pronounced.  But the lump sum offers are not required to account for other potential benefits like early retirement or potential coverage for spouses.   That said, it is important to find out of if there are any benefits you may be forfeiting if you choose the lump sum pension offer. Better to ask and not be eligible for any addition benefits, than to find out after the fact.   Consider running your options with a trusted Fiduciary Financial planner to make sure you are not missing anything.

    • Factor in everything to make the best Pension Lump Sum versus Pension  Lifetime income choice

    Crunching the numbers is the first step. But people in same plan could end up making different decisions based on those numbers and what they may mean for their own personal financial goals and needs. Your health, marital status, other assets, other pensions or guaranteed income are all critical factors to take into consideration.

    Don’t fall for the trap of underestimating how long you may live either. The odds are great that a married couple, each 65 years old, will see at least one spouse live past 90.  A few bucks on even the smallest pension may mean more to you at 95 than they do at 65.  And compared to the present, at 95 you just way fewer options when it comes to changing course on your financial plan.

    For those who don’t really need the income and are looking to pass the assets to loved ones, or perhaps a charity, there will be no remaining assets left over to pass on if you choose the lifetime income option.

    If you are married you want to consider income for your spouse’s life as well.  If you choose a pension income based on your life and pass before your spouse, they could be left in a tough situation when your pension income goes away.

    • Coordinate multiple pensions

    If you are lucky enough to have several pensions you don’t have to make the same choice for all of them.  You may want to consider how much you really need to come in on a monthly basis between Social Security and pension(s). You may choose to take some income via lifetime pension payments and lump sum for others. Picture having your necessities like rent, mortgage and utilities all covered by the pension payments, and more luxury things (travel, gifting, dining out) covered by more variable income from the invested lump sums.

    This is all a very big deal because there are no do-overs on these major retirement planning decisions. Do yourself a favor and don’t make the pension buy out choice willy-nilly.  Sit down with a trusted Fiduciary Certified Financial Planner like Financial Planner LA David Rae who will help you weigh the pros and cons of both options for you, your life and how you want to live.

    Live for Today, Plan for Tomorrow.

    David Rae Pension Lump Sums
    David Rae discussing pension lump sum options with CBS News

    DAVID RAE, CFP®, AIF® is a Los Angeles-based fiduciary financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Investopedia not to mention numerous TV appearances.  He helps smart people across the USA get on track for their financial goals.  For more information visit his website at www.davidraefp.com

    Want to learn more about pension? You might also enjoy:

    Personal Defined Benefit Plan for Small Business Owners Defined


    The opinions voices in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

    Connect With David Rae, Financial Planner LA

    David Rae, CFP® AIF®

    President / Founder DRM Wealth Management LLC

    1(323) 905-4380


    "How to Maximize your Pension Lump Sum or Lifetime Income"

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