Retiring Boomers – Beware of the Lump-Sum!
Boomers are crossing the finishing line in droves each day. One important retirement decision faced by some is whether to take the “pension” or the “lump-sum payment”. My bias, in a very big way, is to take the pension.
1. Think about it. Why would your company want to offer you a lump-sum? Is it because they want to give you more money than you would receive via a lifetime pension? I doubt it. Companies are motivated by profit not altruism.
2. How long will you live? Of course you don’t know – and your company doesn’t know either. What they do know is that approximately one-half of their retirees will live into their 90’s. That’s a long time for your company to be on the hook for monthly payments – and this worries them.
3. What about the product your broker is recommending that guarantees income for life? First, have you seen the size of the ‘prospectus’ (disclosure document)? There’s a reason it is so long. Turns out there are plenty of ways to “blow up” those guarantees. Unless you are able to read and understand every word of the prospectus, be very, very wary. These products are appropriate for some people in some situations. Replacing a guaranteed pension is probably not one of those situations. If you want an unbiased appraisal of a particular product or strategy, seek the advice of a financial planner or CPA who charges by the hour.
4. What if you are worried about your companies health? It’s a legitimate concern. First, find out if your plan is “insured’ by the PBGC (Pension Benefit Guarantee Corp.) Unless you work for the government, a religious institution, or a small professional practice, your plan is probably covered. The PBGC pays benefits up to a given maximum amount per month for participants of plans in distress. In 2013, the age 65 maximum is $4,789.77 per month on a single life basis.
5. What if you are concerned about your own health? Again, this is a legitimate concern. If you are married, your plan will allow you to select a “joint & survivor” benefit, meaning that payments would continue to your spouse after your death. If you are not married, consider a pension option that guarantees a certain minimum number of payments to your beneficiary.
Think twice, even three times, before giving up something as valuable as a pension for life – no matter how good that lump-sum may look.
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