Last month (March 2019), the Treasury Department quietly announced it no longer intends to amend the required minimum distribution regulations under § 401(a)(9) of the Internal Revenue Code (Code) to address the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit plan a temporary option to elect a lump-sum payment in lieu of future annuity payments.Translation? This means that companies can offer to buy out pensions to people who are already receiving them, offering a lump sum of money in exchange.
If you are in a position to receive a pension in your retirement (or, if you are already receiving one), your employer might present you with the option to exchange a monthly pension with a lump-sum offer. What are the pros and cons of this option?
Having Options Is A Good Thing
Every person’s situation is different, and the world is constantly changing and evolving, along with a person’s needs. Understanding your personal situation and financial goals for retirement, along with a comprehensive strategy that coordinates all aspects of your personal and financial situation, can help you determine if a lump-sum buyout may be better for you.
Your Situation Has Changed, and You Wish You Had A “Do-Over”
Maybe you chose your pension thinking you need monthly income. Now, hypothetically, you are five years into retirement and realize you have more income coming in than expenses going out. One of your goals now is to leave a legacy and money to your children and grandchildren. Having a lump sum option buy back could help you get a jump start and invest that money to leave to your family. Or perhaps you took the original pension as a single person after being divorced . You are now re-married and would like to have an income steam for your wife in the event you pass before her. By having a lump sum option, you can now turn around and invest that, or buy an annuity that could provide joint-income payments for life.
Potential To Lose Everything
“A lump sum is not guaranteed to last a lifetime, and all the investment risk is shifted back to the retiree”, said AARP Legislative Counsel David Certner. A bad choice here will lead to great financial hardship for many.
“Often retirees think that if they exchange their pension for a huge chunk of money — sometimes as large as $300,000 or even $400,000 — they can do a better job investing it themselves in the stock market,” says Karen Friedman, executive vice president and policy director of the Pension Rights Center. “But economists warn that rarely, if ever, can people replicate the security of a pension.”
The Lure Of Spending The Money Elsewhere
A 2017 survey from MetLife found that 63 percent of those who had taken lump sums said they had used the money for major purchases or spending within the first year, such as vacations, home improvements and luxury items.
While retirement is a time of life where people should be able to enjoy themselves, seeing a large amount of money in your bank account may cause people to overextend themselves and end up running out of money in retirement.
So, what’s the RIGHT thing to do?
Speak with a professional – someone who will go through your current investments and run a personal benchmark analysis. This person should be able to explain the strengths and weaknesses of your current portfolio, and after understanding your personal situation and financial goals for retirement, present a comprehensive strategy that coordinates all aspects of your personal and financial situation that was gathered in the discovery stage.
At Rubino and Liang Wealth Partners, our retirement planning process is designed to create a personal relationship with our clients, taking the time to truly understand their unique personal and financial situation. Just as no two people are alike, we believe no two retirement plans should be, either.
If you’d like to set-up a time to discuss this topic further, and decided that you’d like to come in for a meeting to discuss your current retirement situation, click here to request a time to chat and learn more about our 365 Retirement Plan.