Should You Accept a Pension Buyout Offer?

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Ford workersA 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.

Gallery: The Big Retirement Myth: You'll Spend Less
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• 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.

For more on retirement issues:

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.



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47 Comments

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gthomp6457

I received a lump sum buyout offer from Ford. After reviewing the numbers with my accountant, I decided to take the lump sum amount. After completing the paperwork, having my spouse's signature notarized acknowledging that surviving spouse benefits were being waived, I returned the package. Several days later, I received another package with no explanation offering a lower amount. After many hours on the phone, I have not been able to determine why the amount has changed. Ford uses outside vendors to handle the lump sum distribution as well as their National Employee Service Center. I was advised to accept the lower amount while they investigate the matter but am hesitant to do so as I know this will waive my claim to the previous amount. Just wondering if this is common practice?

November 04 2013 at 5:43 PM Report abuse rate up rate down Reply
Jenny Goren

On June 1, GM announced their intention to alter their pension plan. These alterations will reduce their pension plan liabilities by an expected 26 billion dollars. The complex plan has both an option for selected U.S. GM retirees to take a lump-sum payment offer, while other retirees have the option to continue receiving monthly pension payments. More information on pension plan details is outlined at: http://youtu.be/32ZRne7AoTQ. Any GM retiree that is affected by these changes is strongly urged to seek advice from a qualified financial planner, as the decision deadline of July 20, 2012 is quickly approaching.

June 27 2012 at 10:06 PM Report abuse rate up rate down Reply
gedking

They say social security is going broke. WHY?? The simple answer is that our jobs are being exported to other countries. and those jobs don't contribute to social security.
Big business and our own Government don't seem to care because they are still getting their fat pay checks!!
while unemployment is on the rise for the average people.

May 28 2012 at 4:17 PM Report abuse rate up rate down Reply
gedking

The only fool is the one who takes motley fools advice. The stocks I picked are going up and the ones I bought after taking their advice has lost.

May 28 2012 at 4:05 PM Report abuse rate up rate down Reply
arenadood

We are on Social Security and I am a USAF 100% disabled retired Vet, my wife is a retired network administrator for San Diego county. Both of us had planned for retirement since we where young, made some right choices and am doing ok in todays economy. Hey you young ones, Plan ahead, do not wait.

May 14 2012 at 9:47 AM Report abuse rate up rate down Reply
samsdcts

BIG ASSUMPTION! Ford will be around to make the pension payments during the next 20 to 30 years. If the Company does any downsizing, selloffs, what's to say they will be in a position to make the pension payments. China and India haven't really hit the car market worldwide yet.

May 14 2012 at 8:03 AM Report abuse rate up rate down Reply
looknorth01

What's a pension?

May 14 2012 at 1:32 AM Report abuse rate up rate down Reply
Jose

COLAS ?? MANY COMPANIES WANT TO GET RID OF THAT ..BUT PRICES CONTINUE TO GO UP AND THAT IS O.K. SOCIAL SECURITY, DIDN'T GET ALL THEIR COLAS.....PRICES ARE GOING UP EVERY YEAR, SO COLAS IN MY OPINION SHOULD BE AUTOMATICALLY ......BEST WAY TO FIX SOCIAL SECURITY ?? HAVE WORKERS PAY MORE INTO IT....RAISING THE RETIREMENT AGE TO 69 ?? NO WAY, MOST PEOPLE DIED BEFORE AGE 69.

May 13 2012 at 9:19 PM Report abuse rate up rate down Reply
Jose

TAKE THE LUMP SUM AND YOU WASTED, THAN WHAT ??? TAKE THE MONTHLY PAYMENTS.

May 13 2012 at 9:14 PM Report abuse rate up rate down Reply
Terry and Mary

MY HUSBAND WORKED FOR 29 YEARS FOR AN AUTOMOBILE PARTS COMPANY. IN 2010 ALL RETIREES WERE TOLD THAT THEY WOULD NO LONGER RECEIVE ANY INSURANCE OR PENSIONS. THIS IS AFTER BEING PROMISED THIS FOR AS LONG AS THE COMPANIES WERE IN OPERATION! THE GOVERNMENT IS CURRENTLY PAYING HIM FOR HIS PENSION (WHICH IS NOT LARGE LIKE SOME AUTOWORKERS MIGHT HAVE).
IF YOU THINK IN THE FUTURE THIS COULD NEVER HAPPEN TO YOU......THINK AGAIN!!
I KNOW FORD HUNG TIGHT WITH THIS ECONOMIC MELTDOWN BUT CAN ANY COMPANY GUARANTEE THE PENSION AND INSURANCE THAT WE ALL ARE TOLD WE WOULD GET AS RETIREES? I SAY NO AND SO DO THOUSANDS OF OTHERS THAT ARE JUST PLAIN PUSHED ASIDE AFTER THEY THOUGHT THAT WHAT WAS PROMISED WOULD BE RECEIVED.

May 13 2012 at 5:36 PM Report abuse rate up rate down Reply
2 replies to Terry and Mary's comment
JUDY

Did his auto parts company have a Union or a contract? If not ---you lose.

May 14 2012 at 7:17 AM Report abuse rate up rate down Reply
papadon.don

The government is currently paying him for his pension??? EXPLAIN!!!!

May 14 2012 at 7:25 AM Report abuse rate up rate down Reply