During the coronavirus pandemic, more people are worried about their company pension plans. Many American companies are under financial duress, which could spill over into the underfunding of pension plans. Make 2020 the year you plan to get the most value from your pension while keeping its cash value safe.
Those looking to retire now because of COVID-19, or just because it is the appropriate time to leave the workforce, most likely want to get the most retirement income they can from their company pensions. Some of you are probably wondering what happens if the company funding your pension goes bankrupt? Should you take the pension lump sum buyout offer? Keep reading as this financial planner highlights things you need to know in order to maximize the value of your pension in retirement.
Should You Take A Pension Buyout?
The number of companies offering pension plans continues to shrink. Similarly, the number of companies looking to shed their pension liabilities is increasing; the Coronavirus lockdown recession can only accelerate this trend. Some businesses are offering pension buyouts to get the hassle and cost of running pension plans off their plates. The decision to accept a pension buyout should not be taken lightly.
I just spoke with a 60-year-old who had worked at the same job for 38 years, yet because of mergers had four separate pensions. Each plan had different retirement income benefits, pension cash values, and accrual of benefits for delaying retirement. Part of his retirement plan will include analyzing the buyout offer he received (for one of the pensions) and how to maximize the value for each pension.
I have seen significant changes come down the line on the pensions of nearly all of my clients who work at large corporations. Companies like ATT, Boeing, Honda, and Toyota have altered their pensions in the past few years. There was also a GE Pension Buyout in the news as well. Some companies are encouraging employees to accept a lump-sum pension buyout offer. I expect to see more of this type of thing as companies revisit their books during the coronavirus recession.
Should You Take the Pension Lump Sum Value
Running a pension plan is time-consuming and expensive. Beyond funding, companies are obliged to pay premiums to the Pension Benefit Guarantee Corporation for every person in their pension plans Individually, the premiums are not that big of a deal, but multiply that by tens of thousands of employees; you are talking about a significant amount of money. This is, of course, on top of what it costs to fund the plan that is expected to provide pension income in retirement for you and fellow employees.
Typically, I am a fan of taking the lump-sum options. The choice grows even more comfortable if the company offering the pension is being ravaged by coronavirus recession. If the company providing the retirement is not on solid footing, the safety and security you think you may have in a pension lifetime income may not be there.
Choosing to take the pension cash value in a lump is not a choice you should make without the right amount of thought and analysis. If you are not comfortable managing large amounts of money (or don’t have the guidance of a trusted financial planner), you may not want to deal with the lump sum option. This is not money that should be used to send your kids to college or pay for a wedding. This is money that is meant to be used to fund your retirement.
Do yourself and your financial future a favor, talk with a fee-only financial planner who can walk you through your options. That individual can also help you develop a financial plan that includes how you are going to fund your retirement. That retirement plan should make it much easier to see which pension options will bring you the optimal retirement income.
You may be tempted to put off thinking about this stuff. No one wants to think about getting old, but sadly, it will happen to all of us eventually. Even if you choose not to take the lump sum pension, you still will have choices to make about your pension income—lifetime income, period certain income, joint life income, and so on. Working with a financial planner can help you make sure you choose the best options for your family based on your age, health, and financial goals. Keep in mind; a pension will most likely not replace your entire income, so you will either need to cut back your spending or have other retirement savings.
What to know about what to do when you receive a Pension Lump Sum Offer
If a pension lump sum buyout offer comes your way, here are a few things you need to discuss with your trusted financial planner. Of course, these questions will vary depending on your age, health, and other assets, not to mention the size of the pension benefits you have earned.
—-Run the numbers: Pension Lump Sum and Pension Lifetime Income Options
I’ve worked with quite a few engineers from Boeing over the years; they crunch those numbers like you wouldn’t believe. Those spreadsheets make me happy. For the rest of America, I know you were probably flashing back to suffering through pre-calculus in high school. The goods news here, the math is pretty straight forward, and running the pension numbers will help make the right pension income choices. You want to compare what type of retirement income you could generate from the pension lump sum cash value—comparing that against the lifetime income options of a pension. Keep in mind that when you pass away, typically, there will be nothing left of a lifetime pension for your spouse or heirs unless you chose the joint-life option or a period certain option.
Pension Lump-Sum Hypothetical
Hypothetically, let’s say your pension would pay $2,500, per month, in 10 years, and they offered you $500,000 now to take the lump sum. Would you be able to grow that $500,000 pension lump sum enough, in 10 years, to generate $2,500, per month, for the rest of your life? If we assume a 4% withdrawal rate, you’d 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% on your investments over the next ten years? What about the next thirty years?
While past performance is not a guarantee of future results, 4.14% is not an outrageously high break-even number. It is possible to find investment products with income guarantees near that percentage or higher. While I’m not a massive fan of annuities, they can provide a guarantee at the base of a retirement income plan. Having some of your retirement guaranteed can bring some peace of mind when markets go crazy as they have during the coronavirus pandemic. Of course, income guarantees are subject to the claims-paying ability of the party providing the guarantee and generally come with additional fees or costs. With the paltry interest rates available on savings accounts, the annoying fees on annuities may not seem that bad.
The lower the investment returns needed to achieve similar incomes in retirement, the more appealing the pension lump sum may be. As the rate of return needed goes up, the risk of a pension lump also increases. The pension lump sum will rarely provide the average worker with enough money to replicate the pension retirement income without some investment in the stock market. Running the numbers will help uncover how much risk is needed. For this hypothetical, assuming a 1.25% rate at the bank, you would need a lump sum of $2,400,000 to produce just $2,500, per month, of retirement income.
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
With some pensions, the lump sum option and guaranteed lifetime retirement income may seem equal. With other pension plans, there may be a substantial difference between the two options. When choosing the lump sum offers, you need to find out if there are any benefits you may be forfeiting, such as health insurance or other health-related benefits. For example, employees of UCLA need to leave their cash value in the pension in order to continue receiving health insurance from the plan. Depending on your personal retirement plan, this may be a deal-breaker or no big. 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 Retirement Decisions
When choosing how to take your pension, crunch the numbers. Your best option may be different than the best choice for your coworker. Things like your health, marital status, assets, other pensions, and guaranteed income are all critical factors to take into consideration when choosing a pension retirement benefit.
Don’t let average life expectancy lead you to underestimate how long you may live. For a married couple that is 65 years old, the odds are high that at least one spouse will be living beyond the age of 90. A few dollars more, per month, from the smallest pension, may mean more to you at 95 than at 65. Let’s be real, at 95 you don’t have many viable options when it comes to changing the course of your financial plan.
Creating A Legacy with Your Pension
For those who don’t need the income now and are looking to leave an inheritance for loved ones, or perhaps a charity, there will be no remaining assets to pass on if you choose the lifetime income option for your pension. If you are looking to leave a legacy with your pension value, you will likely want to choose the cash value pension options, invest the money wisely, and watch it grow over time.
If you are married, you will need to consider income for your spouse’s life, as well as your own. If you choose a pension income based on just your life and pass before your spouse, he or she could be left in a tough situation when your pension income goes away.
Coordinate Multiple Pension Plans
For the few of you who are lucky enough to have several pensions, you do not need to make the same choices with each pension. You may want to consider how much retirement income you will need, monthly, between Social Security and pension(s). You may choose to take some retirement income via lifetime pension payments and a cash value lump sum for others. Picture having all of your necessities like rent, mortgage, and utilities covered by the pension payments, and luxury things (travel, gifting, dining out) covered by more variable income from the invested lump sums.
Take the time to think through these decisions; there are no do-overs on these major retirement planning choices. Sit down with a trusted fiduciary certified financial planner who will help you weigh the pros and cons of both options for you, your life, and how you want to live. You’ve worked tens of thousands of hours to earn that pension; you might as well take a few more hours to maximize the value of your pension retirement income.