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Lump-Sum Pension Offers: Take It Or Leave It?

By: Jonathan Lapine, CFP ®, CPA

Should You Take A Pension Lump-Sum Offer? Answer These 12 ...

Ever since the advent of the 401K in 1978, more share of the burden to financially prepare for retirement has shifted from one’s employer to the employee themself.  Company pension plans designed to provide lifetime income to loyal employees at retirement have slowly vanished from the retirement income scene.  As such, we’ve also seen an increase in company offers to buy out their pension obligations in the form of a one-time lump sum offer, which can typically be rolled over into an IRA to avoid immediate taxation if desired. 

So, what should you do if you find yourself with this decision?  Well, if we only knew one’s date of death it would be a pretty straight-forward calculation to determine which decision results in the most money.  Absent that important bit of information, however, you may imagine it is not that simple to know which direction is best for you.  Here are some considerations to ponder:

When the pension income may make sense:  Every deal is different, but pension incomes can often produce income streams not easily replicated by other investment products available.  Pensions typically generate lifetime income that cannot be outlived and often allow an individual to take a reduced amount in exchange for a joint income stream that can be continued by a spouse at death.  Due of this, pension incomes can often be a good option for people who have expected longevity or whom have significant age differences between them and their spouse.  Additionally, pension incomes can serve as a diversifier to one’s retirement income picture in harmony with social security and other investments and/or savings, making it a popular choice for risk-adverse investors who don’t enjoy seeing account balances fluctuate. 

When the lump-sum buyout may make sense:  Some folks find themselves able to satisfy their monthly needs in retirement without the additional pension income stream, or may appreciate the flexibility that a lump-sum offers. Unlike pension incomes, lump-sum payments can be passed beyond one’s spouse, making it popular for folks who desire to leave their children assets.  Additionally, one has more control over how a lump-sum asset is deployed in their life, whether it be desiring larger one-time withdrawals or for folks who wish to keep income levels in early retirement low to take advantage of various tax strategies (e.g., Roth Conversions).  In general, taking the lump sum is more common for households with that legacy goal, other sufficient income in retirement, or with a shorter life expectancy.

We sometimes get the question of whether a company’s ability to pay it’s obligations should be a consideration.  Particularly in our area, it doesn’t take looking too hard to find many people who lost a big chunk of their retirement picture to a failing business, so one can’t dismiss the concern.  There are, however, some built in protections like the Pension Benefit Guaranty Corp (PBGC), that exist as a mitigating factor in some cases. 

As always, every decision of this nature is unique to the circumstances of the individual and one should consult with a financial professional when weighing their options.

The information provided does not constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Consult your financial professional before making any investment decision.  Indices are unmanaged and do not incur fees, one cannot directly invest in an index.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

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