Over the almost 30 years that I have worked in the financial services industry, I have evaluated a host of lump sum pension options for clients and contacts. The most valuable caveat I share with people is their need to answer a very personal question: how disciplined they are. When someone takes a lump sum from their previous employer’s pension plan, they must now exercise a level of discipline that they may not be used to in their life. When retirement funds are deposited into an employer’s account, it is often difficult (if not impossible) to get your hands on – there is no “ATM card” that comes with employer plans. On the other hand, if someone decides to roll over (roll over) funds from their employer’s plan to their own IRA account, their access to those funds becomes much easier. I have witnessed several clients have reinvested funds or inherited money and for a few years the temptation to take the funds (even paying hefty taxes) is just too great. They end up with a very depleted account when it comes time to retire.
Today more and more companies are trying to get rid of the burden of managing their employees’ pension funds. With all the mergers and acquisitions, the fact that people are living longer, and the ongoing management overhead of holding and paying funds for decades, companies are better able to offer employees competitive lump-sum options. Additionally, there appears to be a growing mistrust among former employees of their previous employers, and that mistrust is increasing the popularity of these employees to withdraw funds from corporate plans and place them in their personal IRA accounts.
Throughout the years in which you completed an analysis of a lump sum option, it was rare for a commercial annuity insurer to outperform the lifetime payment option offered by the corporate pension plan. However, I have recently noticed that with certain employers in my region that have merged or acquired, or decided to greatly reduce their workforce, commercial annuity companies are meeting and sometimes even exceeding the benefits of the plan offered by the corporate plan.
In these cases, the decision to reinvest the funds becomes easier, but the point I raised in paragraph 1, discipline, must be addressed and understood. One of the worst things that can happen is when a 50-year-old decides to take a lump sum option with every intention of investing it and letting it grow for their future, and then for the next 10 to 15 years, chip into the account. taking early withdrawals only to later find yourself with significantly less money and therefore a lower monthly payment during your retirement years.
Also, when making a social security payment decision in conjunction with deciding which monthly payment option to make with employer-based funds (either through a corporate plan or a commercial annuity plan), it is very important to consider the impact of a person who dies prematurely. and what that can do to a surviving spouse. I have been involved with widows (widowers) who have been left in difficult financial situations because their spouse chooses to take the highest amount of benefits (based solely on his life) and then died prematurely. It is very important to seek an attorney when making pension and social security elections, which generally cannot be changed once selected.
Finally, if you are faced with a lump sum option for a pension from a former employer, take the time to evaluate the option. I would encourage you to seek professional advice and advice to ensure that you have as much information in front of you to make the best possible decision.
