Retirement Dilemma: Pension or Payout

Retirement Dilemma: Pension or Payout Picture this: you are getting ready to retire from your company where you have been a loyal employee, working hard for 40 years. The company offers you a $350000 lump sum payment instead of a $1600 lifetime pension. To quote a popular TV show, deal 'Or no deal' Even though many of us would like to be in this situation the truth is this is a major decision and there is no easy answer. The dilemma to take the pension or the payout is quite common in the current corporate, post employment world. So what should one consider in order to make an informed decision?

The main attraction in taking the pension is that you do not have to manage a large sum in a way that it will last you for the rest of your life. In fact there would be no management involved except to remember to cash your check. Here you have the perceived security of a lifetime income. Sounds good so far, right? Only problem is that pesky word perceived. Perceived because this monthly check is dependent upon the company's ability to pay for many years that lie ahead, and as we know from talking to our friends who work for steel companies and airlines things can get a little shaky. So by accepting monthly payments you are tying your economic future to that of the company, not a comforting thought. Of course as I wrote in my last column there is somewhat of a safety net. The Pension Benefit Guaranty Corporation, a federal corporation that will come to the rescue of failed pension plans. But the PBGC does have limits and how long will the safety net last with so many industries in trouble?

The advantages of the lump sum option are mainly having more control over your money. For example lets say after you retire you decide to go into business for yourself and you need a large amount of cash to fund it. By taking the lump sum the money would be available. So if you are comfortable managing the funds to create lifetime income while still maintaining access to a portion of your money you may want to take the payout. By the way, help is available to manage your nest egg. You can always seek the help of a financial advisor. The advisor can determine your risk tolerance, customize a plan suited to you, and working with your CPA can also help you with the tax issues concerning the lump sum distribution.

Ultimately, if you are not comfortable managing a large sum of money then the pension may be the way to go. If, on the other hand, you want more control and flexibility over your retirement funds and you are comfortable managing or hiring a financial advisor to manage your nest egg than the lump sum might make more sense.

This article is not intended to provide specific investment or tax advice for any indivuals.
Securities offered through Linsco Private Ledger a registered investment advisor. Member NASD/SIPC.