Should You Take a Pension Buyout Offer?
By David K. MacLeod, CFP®, CFA
A few years ago, Walt Disney Company offered 5,000 former employees a pension buyout offer. These former Disney “cast members” had an opportunity to sing and dance as they received lump sums of more than $100,000 without having to wait until retirement age. More recently, Boeing and General Electric have also offered former employees large lump sum pension offers.
As more companies drop pensions as a retirement benefit for new hires, they’re also inclined to de-risk and cut ties with former employees. Although the average private corporate pension is in better shape than government pensions in terms of funded ratios, many have underfunded liabilities.
For example, as of 12/31/18, Walt Disney Company had only 88 cents for every dollar of pension benefit obligation. And that’s based on an expected long-term investment return of 7.5% per year, which may not be achieved. It’s no surprise they want to transfer risk to their former employees.
A large lump sum payout offer from your former employer probably sounds really enticing. Before you make an irrevocable decision, we recommend doing some analysis to find out what makes the most sense for you. Here are three factors to consider as you weigh your options.
Check the Health of the Company Backing Your Pension
Is there a risk the company will file for bankruptcy and reduce benefits? If that happens and benefits are cut, the Pension Benefit Guaranty Corporation may provide a guaranteed minimum pension, but you could still receive a significant benefit reduction.
What is the current funded status of the plan, and has it been trending higher or lower? If there’s a high risk of your pension benefit being reduced, you may want to more seriously consider taking the buyout offer.
Look into Life Expectancy
What is your life expectancy? If you are married and considering a joint and survivor pension annuity, what is your spouse’s life expectancy?
If you plan on living a lot longer than the average person (i.e., well into your 90s) and will need retirement income, you may want to pass on the buyout offer and wait for the annuity payment option they’ll offer you at your retirement age.
Consider Your Goals and Potential Needs for Flexibility
Are most of your sources of retirement income less flexible (e.g., Social Security, current employer pension, private annuity)? If so, you may want to lean toward taking the lump sum buyout.
If inflation runs higher and your income doesn’t get inflation adjusted, you may want to draw additional funds from a more flexible source (e.g., an IRA account) to maintain your purchasing power.
Most importantly, we recommend comparing a long-term projection of what the lump sum could expect to provide for you versus what an annuity option could provide for you. A fee-only financial planner can help you make sense of your pension buyout offer and recommend what makes the most sense for you.
Schedule a 15-minute discovery call with a fee-only financial advisor.