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Choose between a Pension and the
lump sum offer?

 

How can you choose between the pension offer and the lump sum offer from your company?

Use the "Wealth Rule." Example: pension offer is $1,800 a month versus a $500,000 lump sum. The "Wealth Rule" would be $500,000 times 5% equals $25,000 annually divided by 12 is $2083.33. All things being equal the retiree would take the lump sum in this example. Other considerations, since not all things are necessarily equal:

  • Inflation or cost of living adjustments later? Lump sum diversified may provide cost of living adjustments later on while most pensions do not.

  • Market risk? Retiree bears the market risk directly so the retiree needs to keep the lump sum properly diversified. Pensions are also subject to market risk since those funds have to be invested by the pension trustees somewhere.

  • Company funding risk? Can the company continue to fund properly the pension, from current profits, so assets are available to pay all the retirees for the rest of everybody's lives? Yes, there's the Pension Benefit Guaranty Corporation, however this may result in a pension cut for higher pension amounts. Lump sum has depletion risk; can the retiree stay disciplined by adjusting withdrawals as appropriate so as not to deplete the assets?

  • Heirs? Pensions disinherit the heirs. Spouse may get a pension if this option elected. No other heirs are includable. Risk here is through premature deaths of retiree and/or spouse. Lump sum provides the option to pass remaining assets to heirs regardless of longevity.
     
  • Wealth Odyssey shows people how to set priorities for themselves based on their unique individual circumstances and concerns; and not try to find the "best" answer someone else might give them that leaves them still uncertain.

See  "Expense Categories in Retirement" (through this link) for a further discussion on how to match retirement income with retirement expenses.