Many companies are offering pension lump sum payout to their former employees. General Motors, Ford, NCR Corp. and GEIGO to name a few are doing as such. What is the reason for the pension lump sum payout epidemic? Companies have their reasons for offering the lump sum payout. We all can speculate. In the final analysis it becomes another creative cost savings. Whatever the reasons, this becomes a bonus to some and a nightmare to others.
Taking a pension lump sum payout is a decision not to be taken lightly. Though lump-sum payouts transfer all the risk—investment, inflation, interest rate and longevity—to the former employee, many nonetheless find the prospect of receiving a large sum of money seductive, and are tempted to forfeit what is essentially a guaranteed monthly paycheck they and their spouse can't outlive.
Let’s look at the presumed guaranteed monthly paycheck. Given today’s financial environment, can anyone assume that your former employer will still be in business at your retirement? Pensions are protected by the Pension Benefit Guaranty Corporation, a government agency that will pay out benefits up to certain annual limits if the plan fails. Please take note most former employees do not know what the value of their pension is at any given time until it is offered as a lump sum payout or when you are told the amount of your monthly paycheck. You are at the mercy of your former employer.
Taking the lump sum payout has its risks and rewards. A few of the risks are listed above. The rewards are tangible. You can see your investment grow. You will be able to monitor your investments and make timely decisions. You will be able to leave a family legacy.
Sit with a financial advisor to determine if a lump sum payout is right for you. If you decide to keep your pension, so be it. If you are looking for financial freedom and flexibility, take the pension lump sum payout. Either way invest in your future your way. I would love to hear your thoughts.