I am 56 and my former employer is offering a lump sum for my pension. Trying to figure out whether to take the lump sum and roll it over to another tax deferred vehicle or keep the pension as is.
Do you have a financial advisor/Investment manager?
If so, then I would take the lump sum and give it to them. They will understand your specific scenario better and be able to manage the money FOR YOU not for the pension.
There are a lot of other factors that need to be considered: Is this your only source of retirement income? How large is the pension? Do you need the money now or can you wait a while?
Sitting down with a professional and working through the nitty-gritty details will benefit you greatly.
The answer depends on
1) your health ... if you're super above average healthy then you might have a tendency to live a long time; possibly outlive many of your cohorts born the same year you were. In this case you might consider taking the pension because odds are you'd live a long time and might outlive your money. If not extraordinarily healthy, then taking the lump sum makes sense because you may not outlive the money and you'd have some for your heirs. You see, the pension only can go to spouses, no other heirs.
2) how comfortable you are investing. If ultra-conservative then you are more likely to outlive your money - in which case the pension would make more sense. You don't need to be very aggressive, just enough for the lump sum to grow as fast or faster than inflation rate of your expenses.
My research collaborators and I recently looked at this question, comparing Single Premium Immediate Annuities (SPIAs) (which equate to your situation like a pension) to lump sum investments. I posted a blog on the findings http://blog.betterfinancialeducation.com/sustainable-retirement/when-should-you-get-an-immediate-annuity/ and they are summarized more by a journalist in an article linked in the comments to this blog post.
Basically, in today's environment, young people should take the lump sum and invest it. However, caveats are 1) your investment expertise - if none or little, then seek out a non-interested fee only third party for answers via the http://www.napfa.org/ Find An Adviser site, and 2) can you control your spending so you don't overspend it? Again, a professional fee only adviser may help you determine prudent spending from the lump sum properly invested for you.
A fee only adviser is suggested so that you retain control of the money, you don't "give" it to anyone for them to invest for you; you get advise and guidance on how you should invest it for yourself.
I know that's a hard decision you're facing - wishing you the best and hope the general guide above helps you, Larry
Larry’s advice is good. The company is offering you a lump sum payment to reduce their pension liability. Here are the pluses and minuses of a pension versus a lump-sum payment.
A plus for the pension is that you will never run out of money while you are alive. You may also be able to structure it so that your spouse will receive part or all of your pension income should you pre-decease her.
The downside for a pension is that once you (or your spouse) dies, the income stops and there is nothing left for your heirs. There is also the risk that inflation reduces your purchasing power over time unless there is a cost-of-living adjustment.
The plus for the lump sum is that it’s your money and you can do with it what you will: spend it, invest it and live off the income, or leave it to the kids. The downside for the lump sum is that your investments lose money or fail to keep pace with your living expenses and you run out of money before you run out of time. There is no general “best” answer. I suggest that you evaluate all the sources of retirement income and decide what you think is best.
Larry and Arie gave some good insights above. To their comments, add this:
Remember that a pension is a promise of future income from a company. Consider the health of the pension in addition to your personal situation. Visit www.pbgc.gov to find your plan's contact. Do your homework to determine if the pension is more risky than your investments might be.
If electing a pension, you'll need to determine when to claim and what spousal benefit to choose (if applicable).
If electing a lump sum, you'll need to determine how to structure your investments to meet your income goal without taking excessive risk.
Find a competent fee-only advisor or CFP, spend a few dollars to put a good plan in place, and enjoy your retirement!
I agree with most of the advice here. I would also recommend you talk to a financial advisor who is a RIA and is also experienced in variable annuities. Fee only advisors are not well exposed to all the annuities in the market, they only limit themselves to few insurance companies that offer variable annuities for fee only advisors. A RIA by law has to do whats in your best interest and has to disclose you if they recommend something that may earn them a commission. Fee only advisor who is not a RIA wont have to do whats in your best interest. They would only maximize their fee.
In your case, Jeremy mentioned the pbgc. I would add more to this. Your pension is guarenteed by pbgc up to a certain amount. ( 54,000 a year). Any rollover will loose that federal guarentee. You may rollover the money and invest in a higher risk investments and later buy an annuity. In that case your annuity is protected by the State Guaranty funds, and the amount of coverage is much less. I would take a Federal guarentee over a State guarentee all day. You may also have COLA benefits, meaning your pension will increase by the rate of inflation every year, you may not find this guarentee in any rollover IRA. Some pension funds, especially union negotiated have better monthly payouts then you would find in the private annuity market. A RIA who offers both fee only and commissioned based models would be a better option for you. If you work with fee only advisors, you will miss a lot on the risk management side.