Based upon the number of companies offering retirees a lump-sum payment offer in-lieu of their pension you would certainly think that to be the case. However, the real answer to that question varies based upon a retiree’s individual situation.
Over the past couple of months, I and other advisors at the firm have met with dozens of clients and potential clients to discuss these various issues. General Motors, Ford Motor, Visteon and Verizon Wireless are some of the companies involved. However, they won’t be the last. In fact, if you currently receive a pension from a Fortune 500 company, I think it is reasonable to expect that you will receive an offer in the future.
Many companies in the last decade have frozen pensions or stopped offering pensions to new employees. This has been very popular with the auto companies. Now, however, due to recent changes in pension law which allows companies to make smaller lump-sum offers than in the past, there seems to be a rising tide of offers. These companies are making these offers primarily to reduce the risk they currently bear with respect to pension liabilities. When a retiree accepts a lump-sum, they are shifting that risk from the company to themselves.
What factors shoulder you consider:
• Monthly Cash Flow – Do you have a surplus or are things pretty tight month-to-month?
• Tolerance for Life Style Adjustments – If your portfolio performed poorly could you reduce your monthly expenses?
• Health – whether you have family longevity or health issues
• Survivor Protection – Is your spouse quite a bit younger or older than you? Is the lump-sum the best way to protect a younger spouse or is it better to take the increased survivor pension in exchange for a lower current pension payment?
• Inflation – As your cost of living increases in retirement, will your investments provide adequate cash flow once your pension and Social Security no longer meet your needs?
• Legacy – Is your goal to give a large estate to beneficiaries or are you comfortable providing for only yourself and/or spouse?
• Estate taxes – Would taking a lump-sum create an estate tax issue for you?
• Safety – What happens if I keep my pension and the company goes out of business?
The above are some of the core issues to consider and discuss with a competent financial advisor. I do recommend that professional help be sought when making these kinds of decisions. Of course, the key is working with a knowledgeable professional who is looking out for your best interests and not just concerned about selling you a financial product that pays fat commissions to the advisor. I am amazed by prospects I have talked with who tell me they spoke to an advisor who recommended they take a lump-sum and purchase an immediate annuity. Why pay a salesperson to sell you what you already have (a monthly check in the mail)? In most cases, after you pay the additional commissions, you are not going to get as good of a deal as you are already receiving.
With the vast majority of clients and prospects I have met with, I have recommended that the retiree keep their pension and in some cases adjust their survivor benefit. However, there are some retirees I met with where it made sense for them to take the lump-sum, primarily because they had a large monthly surplus of income or health issues, and that is what I recommended. In some cases, it would not put retirement success at risk whether the retiree choose the lump-sum or continued with a pension, but those tended to be the outlier, not the norm. Generally, this would be the case when the retiree had saved a sizable sum for retirement and was living below their means currently.
Ultimately, there is no one-size-fits-all answer for retirees. Instead, make a decision based on what is right for your individual situation.
Scott Whyte of Troy is a financial advisor with Bloom Asset Management in Farmington Hills and a member of the firm's Investment Committee. He has more than 20 years experience in the financial industry and has earned his designation as an Accredited Asset Management Specialist (AAMS) through the College for Financial Planning in Denver, Colorado. You can reach Scott with investment questions via email at firstname.lastname@example.org.