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How to weigh pension payouts and pension buyouts

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By Erin Eddins
Financial Well Being
Published: Wednesday, March 27, 2013, 12:01 a.m.
  • Erin Eddins

    Erin Eddins

Paper or plastic? Coffee or tea? If you’re close to retirement and have a defined benefit pension plan, you face a much more important decision: monthly payout or lump sum? Pension plans are required to provide a life annuity payout option, which typically pays the same monthly amount from retirement to the end of your life. Most also offer a lump-sum payout, which you can receive directly or roll over into an IRA.
Even if you’re too young to retire, or already receiving monthly benefits, you may still be asked to decide. Increasingly, companies are looking to get annuitized pension commitments off their books, so they’re offering lump-sum buyouts to current and former employees. Opt for the lump sum and the company’s obligation to you is over. Opt for monthly payments, and the lump-sum option disappears.
Whatever your situation, the trade-off between an income stream for life and a single immediate payment can be complex. Let’s look at pros and cons.
Annuitized: Steady
Monthly payments offer predictability. Every month for as long as you live, you’ll know exactly how much you’ll have to cover your living expenses. The downside: Under most plans, your monthly payment won’t increase with the cost of living, leaving you vulnerable to inflation. And you won’t be able to tap your pension for any large, unforeseen expenses. If you’re concerned about the financial future of your employer, however, it’s good to know that your benefits will be protected, up to a defined limit, by the federal Pension Benefit Guaranty Corp.
Lump sum: Flexible
Trading monthly payments for a large sum up front allows you to invest your money as you wish and draw on it as necessary. But that flexibility comes with some caveats. Your nest egg will be subject to fluctuating markets, and you’ll be responsible for selecting wise investments, making the money last throughout retirement and resisting the temptation to spend your lump sum on non-retirement needs. Keep in mind, too, that if you don’t roll the payout directly into an IRA, it will be taxed as ordinary income, with a possible 10 percent early withdrawal penalty if you take the distribution before age 59½.
Personalize your plan
To sharpen your focus, review your nonpension savings and investments, and check your Social Security statement. If your other guaranteed retirement income plus an annuitized pension benefit roughly matches the basic expenses you expect during retirement, you may want to opt for monthly payments. If your income will exceed expenses, you could use part of a lump sum to cover your monthly bills and invest the remainder for growth.
Also, consider your personal health and family longevity. If you expect an above-average life span, predictable monthly payments might be appealing. If not, taking a lump sum might be preferable. And, of course, a lump sum could make it more feasible to transfer wealth to your heirs.
Before you decide
You can’t consider a buyout offer if you don’t hear about it, so keep your contact information updated with current and former employers. And since buyouts often have a limited time window, save yourself a hasty decision by considering the issue now. In fact, everyone can benefit by refining their retirement plan in advance.
Erin Eddins is a chartered financial consultant, a member of the Financial Planning Association and is a certified financial planner. She specializes in Social Security maximization, pre- and post-retirement planning strategies and asset management. She can be reached at erin.eddins@standard.com or 425-212-5986.
Story tags » SCBJ FinancialSCBJ Columnists

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