Take the Money and Run?

Recently, General Motors and Ford made headlines with their pension buyout offers. Are you also facing the possibility of choosing a lump-sum payout from your pension instead of the traditional annuity option, meaning it would be paid out over time?

This is a trend that is likely here to stay, according to by Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., who wrote about it in AdvisorOne. Here is their advice:

Before choosing whether to remain with the annuity option, which is perceived as a safe bet by many, or opt for the lump sum, there is one thing you will need—advice from a professional.

The lump sum option is a once-in-a-lifetime possibility to customize your stream of income in retirement, yet it’s a decision few should make on their own.

You might be eager to take the buyout, believing you can invest in the stock market and beat the returns offered by your corporate pension. This is unlikely. We all know how the stock markets have performed in recent years, and it would be a fluke for a novice investor to realize significant gains this way.

Additionally, the lump sum will probably be more money than you’ve seen at one time. Also keep in mind that the lump sum offered today will be a portion of the amount that you would receive over a lifetime of pension payments, not the entire amount.

If you are relying on your pension for living expenses, it is critical to understand the need to properly manage these funds, rather than using the seemingly large sum to live a more elaborate lifestyle.

Why choose a lump sum?

So, what should you do with that lump sum? With proper management (and properly managed expectations), the lump sum can provide you with a secure lifetime income stream. The primary benefit of choosing the lump sum over the pension annuity payments is flexibility. While an annuity may remain the most secure option for many of you, today’s annuity options are incredibly varied.

The pension offers a fixed monthly payment for life. In most cases, there is no adjustment for inflation or fluctuating interest rates. Professional management of the lump sum payment can also provide these protections.

For example, multi-year guarantee periods offered with some annuities can ease your worries on locking in an annuity at an interest rate that is too low. A technique called laddering can allow you to protect against interest rate risks by choosing multiple rates over the annuity guarantee period. If you are eager to participate in the equity markets, you may be able do so safely through uncapped index annuities. This strategy ties the earnings of the annuity to a stock index, such as the S&P 500, or to multiple stock indices for greater protection.

If you favor the lump sum option because of the ability to leave a legacy, you can still purchase an annuity and add a rider providing enhanced death benefits. For those concerned about long-term care expenses, annuities with chronic care riders are available.

And for those who are simply not interested in a current annuity option, longevity annuities can provide insurance against outliving current investments.

While there are positive and negative aspects to any of these annuity choices, unlike the traditional fixed pension benefit, each allows you to customize a retirement strategy to your unique goals. Your individual financial position, life expectancy and personal objectives must be considered in evaluating whether to accept a lump sum offer, and, once the offer is accepted, how to manage the proceeds.

One thing is certain, however—if you accept the lump sum buyout, you will need professional financial advice including a review of your life insurance and long-term care needs. Reach out to your professional agent or advisor today before you make any decisions, or if you need to locate an advisor, go here.

Marvin H. Feldman, CLU, ChFC, RFC, President and CEO of Life Happens

by Marvin H. Feldman

Marvin H. Feldman, CLU, ChFC, RFC, is president of the Feldman Financial Group in Palm Harbor, Fla., and president and CEO of Life Happens. He is a 41-year Million Dollar Round Table member and was the 2002 president. He is a 33-year member of the MDRT Top of the Table and a past Top of the Table chairman. He also is the recipient of the 2011 John Newton Russell award, the highest honor bestowed on an individual by the insurance industry.

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