How you handle a pension plan decision at retirement can make a huge difference to you and your family. You can only make this decision once, so get it right.
Few employers today offer pension plans to employees. Most employees had their plans frozen at some point, so the pension funds did not increase. For those who still have a pension plan, companies offer a lump sum payout in place of the old-school monthly pension plan checks. There are a lot of factors to consider, says Kiplinger, in “6 Things to Think About When You Get a Pension Payout Offer,” and you’ll need to give them all careful consideration.
- The Health of Your Company. Do you feel fairly confident that your employer will be around to make those pension payments throughout your retirement? Pension obligations are governed by federal regulations, so your employer can’t just refuse to pay you, even if the company is sold. However, if the company goes bankrupt and defaults on the plan, the government’s Pension Benefit Guaranty Corporation (PBGC) will become the trustee responsible for paying your benefits. You should be aware that it may pay less than 100%. For example, the 2017 maximum annual guarantee for a 65-year-old retiree is about $64,400 per year.
- Your Beneficiaries. Based on your pension’s survivor benefit options, the payments could cease or decrease when you die, and they’ll stop completely when your spouse dies. Your children will receive none of your pension survivor benefits. If you live a long time, that may not be a factor. However, if you die prematurely, you’ll lose money that could have gone to your family. Therefore, you should consider your gift and estate planning goals.
- Your portfolio. How does that look? If the pension lump sum added to your other savings is enough, it might let you delay claiming Social Security benefits until you turn 70. That’s a substantial boost to your guaranteed income.
- Your Expected Rate of Return. You can calculate the rate of return your employer is targeting to generate your lifetime pension payments. This calculation compares the lump sum amount to the monthly pension payments to determine the rate of return based on your average life expectancy. If the employer’s rate of return is high, it may be better to hang on to the pension. If it’s lower, it’s probably a good idea to take the lump sum. A lump sum that’s invested in a well-structured portfolio could generate higher income payments than the pension, or you can grow the lump sum as a legacy to leave to your kids.
Once you receive the offer letter from your employer, read the document to find out how much time you have to make the decision. Your window of time may be extremely short, so you don’t want to lose the opportunity. Remember that the decision will be final. You may want to speak with your estate planning attorney to discuss your options and how this may impact your retirement and your estate plan.
Reference: Kiplinger (November 22, 2017) “6 Things to Think About When You Get a Pension Payout Offer”