Pension Payments: Monthly or Lump Sum?
Ah, retirement! Remember when not long ago that meant a cheerful send-off party, a gold watch, and the promise of a lifelong stream of pension payments that would arrive each month without fail in your mailbox?
Unfortunately, for most of us, the promise of a pension disappeared long ago. However, for those employed by the government, or some of our country’s largest employers, that version of retirement is still very much a reality.
Or is it?
While many attempt to boil this question down to a simple mathematical exercise, I’ve found this to be critically flawed. That exercise assumes the underlying pension is, and will continue to be, solvent.
However, in the wake of a prolonged period of low interest rates, poor stock market performance, and an increasing disparity between the number of workers contributing to plans and retirees receiving payment from those plans, many pensions have faltered. As CNN recently reported, this problem only seems to be increasing. Moreover, the one segment of employers that was once thought to be immune to such shortcomings – state and local municipalities – has begun to falter as well. Unfortunately, this story is not new. The Wall Street Journal recently discussed the Chicago pension nightmare, and I wrote here about Detroit’s pension problems.
So the question remains…retain the monthly pension option, or opt for a lump sum?
Given the above, you’ve likely confirmed by now I’m not an automatic fan of retaining the monthly pension option. However, should you feel your soon to be ex-employer is solvent… consider the following before making this very important decision.
Just Because They Always Were…Doesn’t Mean They Always Will Be
Polaroid, American Airlines, and Bethlehem Steel were once considered some of our country’s most stable and enduring brands, yet in each case, their pensions have failed.
The Pension Benefit Guarantee Corporation, the government entity that insures pensions, is not the guarantee it once was. According to the PBGC’s November 2015 annual report, the PBGC has a combined deficit or unfunded liability of $76.4 billion. This marks a huge increase from 2014. To place it in perspective, in 2012 the PBGC held approximately $85 billion in assets, while its liabilities were $119 billion…a $34 billion deficit. Clearly things are getting worse.
Upon departure from an employer, many feel a sense of disconnect and even betrayal in the case of layoffs. As such, some may feel uneasy about leaving their retirement in the hands of plan they are no longer an active participant in. In the case of layoffs due to downsizing, there may actually be some legitimacy to those concerns. Having provided assistance during downsizing to companies such as AT&T, Wang, Digital, and Polaroid, I can attest first hand to the restricted access imposed on former employees.
The Actual Benefit
Should you still feel, after having read the above, that your former employer will be the exception, there’s still the matter of what the actual benefit is.
- Should you predecease your spouse, does it offer a level or reduced benefit?
- Should both of you pass, is there a benefit for your children?
- Will the benefit be level or include an increase for inflation?
The answers may surprise you.
So, Does Lump Sum Mean You Can Have Your Cake And Eat It Too?
That depends on whether or not you like cake. What I mean by that is this: In cases where an employer-sponsored pension offers a “lump sum buyout,” it can be used to establish your OWN private pension. Doing so allows you to insulate yourself from any systemic issues the company plan may be experiencing.
The key is…you are in control.
While there are many ways to generate income (dividends, interest from bonds, REITs, Limited Partnerships, etc.), none of them are guaranteed. As such, due to the heightened uncertainty of the markets, I’m increasingly leaning toward annuities for this component of income. Now, I know what you’re thinking… “Yuck, I don’t like annuities!” Traditionally, I’m not a huge fan either. However, in this instance, when attempting to generate a source of guaranteed income, I am a fan of protecting a small portion of your assets in a very specific type of annuity.
One that will not only generate an income that will last as long as you do, increase in the years ahead, and provide your spouse a level benefit, but – and this is key – will also enable you to maintain access to and control of your money while doing so.
Now, that doesn’t sound so bad does it?
With your core income now secured with guaranteed sources, your remaining assets may be prudently invested as a source for additional income as it’s needed. Following this approach enables you to establish income in a sustainable, repeatable, and verifiable manner.
Best of all, you do so while maintaining complete access to and control of your money — precisely what you’d expect from a personal pension plan.
With too many pensions on shaky ground these days, a conversation about these potential “what-ifs” with a financial adviser, who is experienced in this area, would be a very good idea indeed.