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Lump sum pension options are growing in popularity

During the nearly 30 years I’ve worked in the financial services industry, I’ve evaluated a bucketful of lump-sum pension options for clients and contacts. The most valuable warning I share with people is their need to answer a very personal question: how disciplined are they? When someone takes a lump sum from their former employer’s pension plan, they must now exercise a level of discipline that they may not be used to in their lifetime. When retirement funds are in an employer’s account, they are often difficult (if not impossible) to obtain, there is no “ATM Card” that comes with employer plans. On the other hand, if someone decides to transfer (roll over) funds from their employer’s plan to their own IRA, their access to those funds becomes much easier. I have witnessed several clients who have transferred funds or inherited money and for some years the temptation to take the funds (even paying hefty taxes) is too great. They end up with a seriously depleted account when it comes time to retire.

Today, more and more companies are trying to get rid of the burden of managing their employees’ pension funds. With all the mergers and acquisitions, people living longer, and the ongoing management costs of holding and paying funds for decades, companies are more apt to offer employees competitive lump-sum options. Additionally, there appears to be a growing mistrust among former employees of their former employers, and that mistrust is increasing the popularity of these employees withdrawing funds from corporate plans and putting them into their personal IRAs.

Over the years, when completing an analysis of a lump sum option, it was rare for a commercial annuity insurer to outperform the pay-for-life option offered by the corporate pension plan. However, I have recently noticed that with certain employers in my region that have merged or been acquired, or decided to greatly reduce their workforce, commercial annuity insurers are meeting and sometimes even exceeding plan benefits. offered by the corporate plan.

In these cases, the decision to transfer the funds becomes easier, but the point I made in paragraph 1, discipline, needs to be addressed and understood. One of the worst things that can happen is when a 50 year old decides to take a lump sum option with every intention of rolling it over and letting it sit and grow for their future, and then over the next 10 to 15 years it falls apart. . into the account by making early withdrawals only then to find yourself with significantly less money and therefore a smaller monthly payment throughout your retirement years.

Also, when making a social security payment decision along with deciding which monthly payment option to take with employer-based funds (either through a corporate plan or a business annuity plan), it is very important consider the impact of a person dying prematurely. and what that can do to a surviving spouse. I have been involved with widows (widowers) who have been left in dire financial straits because their spouse chose to take the higher benefit amount (based on her lifetime alone) and then died prematurely. It is very important to seek advice when making social security and pension elections, which generally cannot be modified once selected.

In closing, if you are faced with a lump-sum option for a pension from a former employer, take the time to evaluate the option. I would encourage you to get some professional advice to ensure you have as much information in front of you to make the best possible decision.

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