Should You Take a Pension Buyout?

What factors should you consider before you make the irrevocable choice?

If you get a pension buyout offer from your former employer it may cause some anxiety. You have to decide if the lump sum offer is a better deal for you or the corporation making the offer. 

Your decision to accept or reject a buyout offer can only be made after you consider some key variables. Consult a trustworthy financial advisor to help you analyze the variables and make a decision that is in your best interest.

How large is your buyout offer? Compare the lump sum to the total pension payments you think you will receive over your lifetime. Consider how much you would receive if you live another 10, 25, or 40 years. Keep in mind that the effects of inflation mean that a dollar today is worth more than a dollar will be worth even five years from now.

How long do you think you will live? If you have health concerns you may want to take the lump sum now. On the other hand, if you expect a long retirement then the regular payments may present less risk and provide you with a regular income when other funds have run out. 

What about taxes? A lump sum distribution from a pension or retirement account is "taxable income" according to the IRS. In addition, if you are under 56 1/2 years old, you will likely have to pay a 10% penalty on the distribution. A direct rollover to an IRA or other qualified retirement account is not subject to tax or IRS penalties. 

What kind of return could you get if you invested the money? Could you invest your lump sum so it keeps up with inflation? Could your investment generate more retirement savings and income for you in the long run?

Who will help you invest a lump sum? Pension funds are overseen by professional money managers. Could you manage your retirement savings in a similar manner? It would be wise to talk to an investment advisor. Market volatility can result in lower values once you reach retirement - are you comfortable with the risk inherent in market investments? A monthly payment will help you avoid that loss of principal.

A lump sum distribution could change your life. Sometimes a "windfall" can change a person's lifestyle in even subtle ways. If you have cash in hand, or in the bank, then you are more likely to splurge on little things and "one time" purchases. It can be surprising how quickly a person can spend through $300,000 or more and lose your retirement savings. A direct rollover or monthly payments can help you avoid this risk.

​Get an unbiased analysis of your options. Bring your buyout offer letter to a free consultation to get help running the numbers and evaluating your options. I will give you a complementary report showing the present value of your pension payments over the years. We can talk about investment options and your risk number. There is no obligation and no charge for this meeting and report.
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