Debt Free

If you’re one of the dwindling number of Americans that still has a traditional company pension plan, you may be faced with a somewhat daunting choice; get all the money now, or take a disbursement over time. Most retirees take the money now, but should you follow suit? 

If you are disciplined and a skilled investor, or use a financial advisor who is, taking all the money in a lump sum may indeed be the proper choice. However that doesn’t describe the majority of those with defined benefit pension plans. Many are fairly unsophisticated investors who’ve never had to manage a large sum of money before. That being the case, a majority of them is ill-equipped to manage it correctly. You should know this too; if they are not one of those who bill on an hourly basis, your financial advisor will make a tidy bit of cash if you receive the lump sum payment option. That’s because they will rake in substantial commissions from the investments you purchase with the retirement plan funds you receive.

How can you determine which is the proper way to go? Well, there are probably as many answers to that question as there are retirees and financial consultants, of which I’m neither. However there are some simple questions you can ask yourself to assist you in determining the proper course of action. Plan this move well in advance, and give yourself plenty of time to make the proper retirement choice. If you mess this one up, it could make the difference between your next decision being weather to eat at McDonalds or Wendy’s, or work there.

Your pension plan is an annuity. It will pay you a steady income stream until your death. In many cases your spouse may receive payments until their death as well. The value of the annuity is determined form your pay and how long you were with the company. The lump sum is based on the national life expectancy figure, combined with the previous two figures. Your expected remaining life weighs heavily on your decision. If you’re as healthy as the proverbial horse, you may do better if you take the lifetime payments. Why? Because the lump sum, being calculated from a national average, is likely to be smaller that what you’ll receive if you live a long, fruitful life after retirement.

Look at your life as an actuary would. How’s your health? What about your family health history? If both are good, you may outlive the national estimate by a substantial margin, assuming you don’t get hit by a train next week. Be honest, if you’re substantially overweight, in poor cardio vascular health, or have been told to shape up by your physician, you should do so, or check the “lump sum” box.

As a way of comparison, the U.S. DCD gives the average life expectancy of a 65 year old American male in 2004 as just under 83 years. A woman can expect to last a bit longer, to 85 years. If your family is full of centarians, you will probably come out ahead by getting a steady stream of payments from your pension plan, as opposed to that one, big check.

You may be tempted to view the whole thing with the “bird in the hand” mentality, and take the lump sum. That may be the proper thing to do if your company is on shaky ground financially, especially with regard to its pension finances. You are, however federally insured up to $49,500 per year if you’ve retired at age 65 or later. That’s something to think about. That dollar figure applies to pension plans insured by the Pension Benefit Guarantee Corporation (PBGC) The PBGC will most likely apply if you worked for a private firm (except most law firms or physician’s organizations) of greater than 26 employees, that had a defined benefit retirement plan. You should make a quick call to your HR or pension department to be sure.

You may also do better if you company offers a bonus for early retirement. Some firms have concluded that it’s better to show employees the door a bit early, than continue to provide them with a weekly paycheck, insurance and other benefits. Keep in mind that every retirement plan is somewhat different. You should know the details of your specific plan before you decide.