A group of 90,000 former salaried workers at Ford ( F ) got an interesting offer late last month: In exchange for giving up the right to receive monthly pension benefits for the rest of their lives, the company would instead pay them an up-front lump sum of cash.
To anyone who's ever dreamed about winning the lottery, taking the up-front cash seems like a no-brainer. But in today's market environment, Ford retirees find themselves with a much more difficult decision on their hands than you'd think.
Take the Money and Run...
Accepting a lump sum in exchange for future payments has obvious appeal. Not only can you stop worrying about what might happen if your former employer runs into financial difficulties, but you also get the opportunity to take the money and invest it yourself -- hopefully in a way that gives you better returns.
With pension lump-sums, you usually have the right to take the money and roll it over into an IRA of your own -- avoiding negative tax consequences and getting the benefits of tax deferral during your retired years.
Moreover, the lump sum gives you some options that pension recipients don't get. Most pension payments end after the worker's death, with married workers often leaving survivor benefits to their spouses. A lump sum, however, lets you leave any leftover money for children and grandchildren or other purposes after you die.
...or Play the Odds and Sit Tight?
While an offer to take a huge sum of money may seem almost impossible to turn down, if you're offered the chance to get a lump sum from your pension plan, don't just take the money and run before you've taken time to consider all the implications.
In some cases, pensioners are better off not taking the deal. Some reasons you might want to stick with the pension:
• You've got good genes: As wealth manager Leon LaBrecque recently explained in a blog post, retirees who are in perfect health are likely to turn out to be big actuarial winners by keeping the pension -- because they'll likely have longer lifetimes over which to collect monthly benefits. Even if you just have a family tendency to live above-average lifespans, the odds are in your favor if you keep the pension.
• You're a woman: LaBrecque also points out that by federal law, Ford and other pension plan sponsors aren't allowed to take gender into account when calculating lump-sum payments. That means that women, who tend to have longer life expectancies, get dinged on lump-sum calculations, while men arguably get more than their shorter overall life expectancies would warrant. Women, therefore, should think hard before taking a lump sum.
• Your company is using new pension calculations: Another argument against taking a lump sum is more technical. A few years ago, a change in pension law allowed companies like Ford to use calculations that have resulted in lower lump-sum payments to pensioners . That's good news for Ford, but not necessarily the best result for its workers. In essence, that means that if you take a lump sum, you'll have to do a good job of investing that money on your own if you want to match what you would have gotten by keeping your benefits.
• The money will trigger taxable events down the road: The decision of whether to take a lump sum also has significant tax implications. Although rolling over the lump sum to an IRA prevents a big upfront tax bill, you'll have to pay taxes as you take distributions from your retirement account. Those distributions in turn can affect other parts of your finances, such as how your Social Security gets taxed and what tax bracket you're in.
Perhaps most importantly, taking a lump sum puts the responsibility of investing onto your shoulders. That can bring big rewards if you invest well. But if you make a bad investment, you'll never get your lost money back.
Sometimes, the best answer will be to turn that money down and keep collecting safe, stable monthly checks for the rest of your life. The only way you'll find out is to do your homework before you accept a lump sum.
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Everyone who takes a lump sum always say they are going to invest it wisely. My mother worked for one of the baby-bell phone companies (it was SBC at the time) when the employees where offered an early retire by either taking a lump sum or monthly payments for life. Ever single one of her co-workers took the lump sum (except my mother) and spent and/or lost it all within three years and all of them had to find a new job (most not nearly as good as a job they use to have) while my mother is still getting her monthly pension after nearly 20 years and has not worked since then.
I would take a "buyout pension", with the way money suddendly disappears from major corporations, a person shouldn't gamble with the hope of a promised future, get what's yours while the gettin is good!
GE retired 1996...was not offerd a buy out but between my pension and SS (prior to my 62 b-day I received a SS supplement from GE) avg. $50,000 net. per year. GE was very good to me.(and the US too)
This is a no brainer....for a (greedy) American corporation its all about the bottom line (cutting costs and profits to the major share holders) and if they are making the offer its not going to benefit you in the long run.
whats a pension? im in the private sector. i know by my escalating property taxes im am paying for somebodys 20 and out in the municipality.
Ok hears the truth about municiple pensions. The average city worker, lets say a fireman who starts at age 24 he makes 50k and he retires after 20 years. He gets half of his salery so he'll be making 25k, but heres something the politians will not tell you. He cannot collect his pension until he turns 55 under the new pension law. So what does he do for the next 11 years? He has no income coming in. Heres another thing the politians don't want you to know. A state Rep and Senetor can collect 50 % after 5years, 65 % of their sallery after 12 years, 85 % after 20 years. Now who's to blame for pension problems? Oh and here's another fact the ex mayor of Chicago is collecting 189,000 for working as the mayor of chicago, dist. attorney and state rep. So he collects three pensions, not a bad haul since he and other mayors and state politians don't pay one dime into the pension or their health insurance.
In NY Workers' Comp Law, permanently disabled workers may receive long term benefits. (Not sure if time limits are now in effect). In the old day payments went on for life. Insurance companies had to reserve small fortunes for this type of case. The Law allows the insurance companies to offer Lump-sum settlements. It was our job to review each case against actuarial tables to advise the lump-sum applicants..The Lump-sum offered was from three to five years of weekly benefits...The Actuarial Tables (life expectancy x weekly benefit rate told a much greater story.
So the questions are: is the close-out offering paltry compered to a lifetime of pension benefits? Is the company likely to stay solvent during your lifetime? Can you do better investing on your own? Will your Social Security/other fund sources cover expenses? Are you well enough to take the close-out? Are there any other benefits you lose by accepting a close-out? They are not doing YOU any favors. It improves THEIR position by freeing up those investment reserves! Seek professional counsel! Hope I haven't hurt any coroprate feelings!
Should you accept a buy out of your pension? My advice is yes, IF your in your 90's and told you are terminally ill.
I worked for General Motors all my life and am now retired I would not take a lump sum buy out I was a hourly and just don't feel right about takeing a buyout no my pension is not for sale I worked to long and hard for it and all my other benefits.
"Those distributions in turn can affect other parts of your finances, such as how your Social Security gets taxed and what tax bracket you're in."
So do your monthly benefits if you don't take a lump sum.
What's the difference?
most likely the LUMP SUM would bump you up to an entirely different and higher tax bracket,but either way you're screwed with tax accountability
and ALL better wake the hell up and get educated as to WHAT 2013 taxation IS--
and THANK THE DIM OBOmbA_bot MORONS for their IGNORANCE.
..............buuuuuuuuuuuuuuuush tax cuts for the rich me_arse......they WERE TAX RATES and tax rates across the boards FOR ALL.
If you have a Ford pension, the buyout is probably not a good option. Even though the auto industry has had a rough time of it, and probably will again at some point, the US needs the auto industry so Ford isn't going anywhere. Many other companies, however, are not so secure. And if your pension is tied up in the stock of a legacy company that is steadily losing ground, you may find yourself out in the cold. A conundrum, to be sure, but one that retirees had better investigate closely.
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