The number of companies looking to offer lump-sum pension buyouts is increasing, since it is expensive and time-consuming to continue managing pension plans. Employers offer buyouts in the form of a lump sum payment to avoid further obligations to employees. Although, it can be a win-win situation and benefits employees too by providing a large payday. While a lump-sum buyout can be a great financial choice for some employees, for others, it may not be as beneficial.
The challenging decision of whether to accept a lump sum buyout or go with pension payments is full of variables. This right choice depends on your situation and retirement needs. If you take a lump sum, you could run the risk of running out of money during retirement. However, if you choose monthly payments and you pass away unexpectedly, you and your legacy could receive much less than the original lump sum payout offered.
These possible outcomes make it very critical that you carefully consider your overall situation, as the decision will affect your retirement and the future of your family. Here are five key things to take into consideration as you are deciding whether to take a lump-sum buyout or a pension from your employer.
Lump-sum buyout amounts are often based on actuarial tables of life expectancies. You’ll need to consider longevity and the length of the monthly payments. Therefore, if you are one who maintains a very healthy lifestyle, you may outlive the average life expectancy. This means that choosing monthly payments would probably be a better choice than one lump sum payout. On the other hand, if you have a family history of short life expectancy, a lump sum buyout might make sense.
It is important to be realistic about your expenses throughout retirement and develop a detailed plan. Calculate your current and expected future monthly expenses to determine how much income you’ll need to generate. Social Security, your retirement accounts, and any other income sources need to be taken into consideration. While the general rule is to estimate drawing 4 percent of your portfolio per year in retirement, this rule can’t necessarily be applied to everyone’s situation. Also, if you lean toward a spendthrift mentality, passing up a buyout all together just might be the right choice.
You might be wondering why your risk tolerance matters. If you’re in your 50s, choosing a lump sum payout and investing aggressively for twenty years may be more likely to generate more future income than would be possible from a pension plan paying out monthly. However, once a buyout is taken, the investment risk shifts to you and not your employer. If you accept the lump sum, you have control over investing it yourself, providing opportunities for potentially higher rates. You’ll need to consider how much risk you are willing to take on.
It is common for employees to overlook the long-term health of their company. But it is a reality that all companies are not financially stable. If a company defaults and its pension plan obligations then depend upon the federal Pension Benefit Guaranty Corp., only a portion of the benefits previously promised may be a reality for employees. With company instability, a lump sum might be a better choice, so it makes sense to think about the company’s long-term future.
Your plans for your retirement contribute significantly to your decision. If your goal is ongoing income and peace of mind, it would be a better option to choose the pension and receive payouts. However, if your goal is to leave a legacy for children or grandchildren, a lump sum may be more suitable. Your overall financial health and retirement goals must be taken into consideration when making the decision between a lump sum buyout and pension payments.
Lastly, it is important to remember that your decision is irrevocable. So, you must make sure you fully understand the terms and conditions associated with a buyout offer. It must be understood what you are giving up in terms of pension payments to accept a buyout and vice versa. There can be a substantial difference between the two available options and how they will affect your future.
If you need professional guidance with your decision on whether to accept a lump sum buyout and would like to better understand the options available to you, please schedule an appointment on our online calendar by selecting the date and time that is most convenient for you! You can also always reach us at info@bayntree.com.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.
