A group of 90,000 former salaried workers at Ford (F) got an interesting offer late last month: In exchange for giving up the right to receive monthly pension benefits for the rest of their lives, the company would instead pay them an up-front lump sum of cash.
To anyone who's ever dreamed about winning the lottery, taking the up-front cash seems like a no-brainer. But in today's market environment, Ford retirees find themselves with a much more difficult decision on their hands than you'd think.
Take the Money and Run...
Accepting a lump sum in exchange for future payments has obvious appeal. Not only can you stop worrying about what might happen if your former employer runs into financial difficulties, but you also get the opportunity to take the money and invest it yourself -- hopefully in a way that gives you better returns.
With pension lump-sums, you usually have the right to take the money and roll it over into an IRA of your own -- avoiding negative tax consequences and getting the benefits of tax deferral during your retired years.
Moreover, the lump sum gives you some options that pension recipients don't get. Most pension payments end after the worker's death, with married workers often leaving survivor benefits to their spouses. A lump sum, however, lets you leave any leftover money for children and grandchildren or other purposes after you die.
...or Play the Odds and Sit Tight?
While an offer to take a huge sum of money may seem almost impossible to turn down, if you're offered the chance to get a lump sum from your pension plan, don't just take the money and run before you've taken time to consider all the implications.
In some cases, pensioners are better off not taking the deal. Some reasons you might want to stick with the pension:
• You've got good genes: As wealth manager Leon LaBrecque recently explained in a blog post, retirees who are in perfect health are likely to turn out to be big actuarial winners by keeping the pension -- because they'll likely have longer lifetimes over which to collect monthly benefits. Even if you just have a family tendency to live above-average lifespans, the odds are in your favor if you keep the pension.
• You're a woman: LaBrecque also points out that by federal law, Ford and other pension plan sponsors aren't allowed to take gender into account when calculating lump-sum payments. That means that women, who tend to have longer life expectancies, get dinged on lump-sum calculations, while men arguably get more than their shorter overall life expectancies would warrant. Women, therefore, should think hard before taking a lump sum.
For more on retirement issues:
• Your company is using new pension calculations: Another argument against taking a lump sum is more technical. A few years ago, a change in pension law allowed companies like Ford to use calculations that have resulted in lower lump-sum payments to pensioners. That's good news for Ford, but not necessarily the best result for its workers. In essence, that means that if you take a lump sum, you'll have to do a good job of investing that money on your own if you want to match what you would have gotten by keeping your benefits.
• The money will trigger taxable events down the road: The decision of whether to take a lump sum also has significant tax implications. Although rolling over the lump sum to an IRA prevents a big upfront tax bill, you'll have to pay taxes as you take distributions from your retirement account. Those distributions in turn can affect other parts of your finances, such as how your Social Security gets taxed and what tax bracket you're in.
Perhaps most importantly, taking a lump sum puts the responsibility of investing onto your shoulders. That can bring big rewards if you invest well. But if you make a bad investment, you'll never get your lost money back.
Sometimes, the best answer will be to turn that money down and keep collecting safe, stable monthly checks for the rest of your life. The only way you'll find out is to do your homework before you accept a lump sum.
Motley Fool contributorDan Caplinger is one of those strange eggs who find actuarial calculations fascinating. He doesn't own shares of Ford. You can follow him on Twitter here. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position in Ford.