How To Turn Your Pension Cash Value Into The Most Retirement Income

Pensions were once the cornerstone of a secure retirement. They provided a retirement income you could not outlive. Today, pension plans are being eliminated or at the very least, are less generous to workers. If you are lucky enough to still have a pension, it is imperative that you plan to maximize the valuable retirement gift you have worked hard to earn.

Ultimately, you are looking for ways to create the most retirement income from your pension and the corresponding cash value.

Keep reading for answers to some of the most common pension planning questions, as well as for tips to maximize your pension income and increase your retirement security. Most importantly, we will walk you through whether or not you should choose to take the pension value in a lump sum or as lifetime income?

In the good old days, retirement was easy. You likely had a pension that would replace something around 70% of your preretirement income. Throw in Social Security and Social Security spousal benefits, and you likely retired with nearly as much income as you had while working.  

I think it is fair to say that few of today’s workers are able to retire as securely as many retirees were able to in the past. Today, many people are retiring on Social Security alone.

Should You Take the Pension Buyout?

With more and more companies looking to shed their pension liabilities, employees are often given the option of a pension buyout. Still, other companies are looking to offload the long-term management of their pension liabilities to annuity companies. 

Recently, General Electric (GE) made news when the company froze the pensions of more than 20,000 employees. Additionally, companies like Toyota, Honda, and Boeing have made changes to the retirement benefits of their employees. Newer companies, like Space X; Tesla; and Apple, do not offer a pension to their employees. Before making a decision, keep in mind that your goal should be to get the most value from your pension benefits. You have worked your entire life accruing them; don’t rush into a choice that could cost you tens-of-thousands of dollars in retirement income benefits over the rest of your life.

For most people with a sizable pension benefit, the choice isn’t always cut and dry on whether to accept a pension buyout. Keep reading to find out how to maximize your own pension benefits. This may mean making a pension lump sum rollover or sometimes choosing lifetime income.

Pension Buyouts Are Not A Gift

Your pension is meant to help you live in retirement. I recently spoke with a couple who were chomping at the bit to take the lump sum option and go on a shopping spree. I had to calmly ask them how they expected to pay for living expenses if they spent their entire pension cash value. “Oh! We didn’t think of that,” was their response. While it may feel like a gift, pension cash balances need to last the rest of your life, so take care of that money.

With that in mind, be aware that your employer is not doing you some big favor by offering to buy you out of your future pension benefits. The reality is that many companies would prefer to be done with the hassle and expense of administering a pension plan. Companies have to pay premiums to the Pension Benefit Guarantee Corporation for every person in their pension plans. Those premiums can add up quite quickly for companies with large numbers of employees. Likewise, the cost of funding and administering a pension plan can be quite costly as well.

Choosing between rolling over your pension lump sum to an IRA, or accepting a lifetime retirement income stream is not a decision you should make willy-nilly. Do not be surprised if you are expected to make this big retirement choice quickly. It is not out of the ordinary for employees to be given just sixty-to-ninety days to decide how to handle their pension lump sum buyout offers.

Do yourself a favor and take the extra time to sit down with a fiduciary financial planner. He or she can help walk you through your various options and make sure you are making the best pension choice for your specific situation, time frame, and financial goals. You need to make the smartest financial decisions possible. The worst thing you can do is to rush and let emotion cloud your judgment.

What to Know When You Receive a Pension Buyout Offer

Here are a few things you and your fiduciary financial planner should discuss if a pension sum lump buyout offer comes your way. 

Run the numbers for both Pension Lump Sum and Pension Income for Life Options

Do the math probably was not what you wanted to hear. All the same, running the numbers will make it easier for you to see if one option is better for your personal retirement goals than the other. Your pension is likely your most valuable retirement asset, and it is important to treat this decision with the respect it deserves.

See what type of retirement income you would receive if you accepted the lifetime retirement income from the pension. Compare that against the type of guaranteed income, you may be able to generate from accepting the lump sum pension buyout.

Hypothetically Speaking

Hypothetically, let’s say your pension would pay $1,000 per month in 10 years, and they offered you $200,000 now to take the lump sum. Could you potentially grow that money enough to generate $1,000 per month for the rest of your life in 10 years? Assuming a 4% withdrawal rate, you would only need the investment to grow around 4.14%, per year, to break even. 

Do you think you could potentially earn more than 4.14% from your investments? That is not an outrageous return. All the same, it may depend on 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 do not provide the average worker with 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.

Factor in Everything to make the Best Pension Lump Sum versus Pension Lifetime Income Choice

Crunching the numbers is the first step. Your coworkers in the same pension plan, with similar benefits, could end up making different decisions based on those numbers and what they may mean for their own financial needs. Your health, marital status, other assets, other pensions, or guaranteed income are all critical factors to take into consideration when choosing how to take your pension benefits.

Avoid the trap of underestimating how long you may live. The odds are that one half of a married couple, who are both 65-years-old today, will live past 90 years of age. A few dollars on income from 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 have way fewer options when it comes to changing course on your financial plan.

For those not needing the income and who are looking to pass on the assets to loved ones, or perhaps a charity, there will be no remaining assets to bequeath if you choose the lifetime income option.

Married individuals should consider income for their spouses, 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.

Related: How Small Business Owner Can Play Catch-Up For A Great Retirement

What to Do When You Have Multiple Pensions

Today, it is rare for people to remain with the same employer for their entire working years. It is more common for individuals to work for multiple employers and have several pensions and other retirement accounts. If this is you, luckily, you do not have to make the same choice for how you take each individual pension. You only need to consider how much money you will need to have coming in every month from Social Security and your pension(s).

Take time and put thought into these major retirement-planning choices. There are no do-overs in retirement. Sit down with a trusted advisor to make sure you understand your options, and the tax consequences of your choices, between taking a lump sum pension buyout and the lifetime income from a pension.   With some expert financial guidance, you can find the right solution for your personal situation. This advice will help you turn your pension into the most retirement income possible.