I’ve recently learned of several companies offering lump-sum buyouts on frozen pension plans. Unfortunately, most Plans seem to give their participants a fairly small window to make this huge financial decision. So, what should you do if you receive one of these offers?

First off, let’s take a step back. If you participate now or previously participated in a pension, take the time to fully understand the pension and the benefits available. This way, if the benefits do change, you at least have a starting point from which to consider it.

Once you understand the benefits that you are entitled to, determine how this asset fits into the rest of your retirement plan. In other words, ask yourself the following:


What will my income needs be in retirement?

If you have other pensions or social security will cover your basic expenses, you might want to opt for the lump sum as it will give you greater control over that portion of your income. The reverse is also true, If you don’t really have any other sources of income or your income will not be high enough to cover your basic expenses, you may want to opt for the guaranteed monthly income.

If you want full control over your pension assets during retirement, or are concerned that your pension income may not keep pace with the cost of living, then a lump-sum distribution may be the best choice. You can take a lump-sum distribution in one of two ways. You can either roll it over into your own Individual Retirement Account (IRA), or you can receive the pension proceeds net of income taxes. Unless you plan on using your pension assets for something other than retirement, consider other options than receiving your lump sum net of income taxes. The IRA rollover may make the most sense because you’ll continue to receive the benefits of tax-deferred accumulation, and only be taxed when you take withdrawals from the IRA.

calculating pension benefits

How long will I live?

Obviously, nobody knows exactly how long they are going to live. However, you can consider your own health as well as your family history. Pension benefits are calculated based on life expectancy within a certain group of people. You have the inside track in determining whether or not that’s a reasonable estimate for your own life. If you have some chronic health issues that you believe will limit your life expectancy then it might make sense to accept the lump-sum, especially if you are not married. This will allow you to leave more of your benefit to your estate.

If you’re worried about outliving your assets, regardless of your marital status, you should take one of the two “income” options. It’s a simple way to ease your fears about running out of money. If you’re single, this choice is easy, because you can only select the single life option. However, if you’re married it’s a different story altogether because you can choose either the single life annuity or the joint and survivor annuity.

What does my spouse need? Or, if divorced, what was agreed to in my divorce settlement?

The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, payments continue until the death of both you and your spouse. If you have other substantial retirement assets, or your spouse has his/her own pension, taking the larger income offered by the single life option may be your best bet. On the other hand, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option may be the way to go.

As previously mentioned, both of these payout options require that you give up your pension balance in exchange for income. In other words, you can’t just select a payout option one day and then decide at a later date that you’d like to change your selection.

Keep in mind that if you are divorced and you and your former spouse specified in your Separation Agreement how your pension should be handled, you’ll need to follow through on that obligation.


questions about retirement planning

Do you need assistance determining which pension option is best for you?

As you can see, before you can relax into a comfortable retirement, you must make a difficult decision about your pension proceeds. This will require you to carefully consider several options to determine which one best meets your financial needs and goals.

We are happy to assist with this process and will conduct an in-depth scenario analysis to determine which option is best for you. While we are based in Ohio, we maintain an active online presence and meet with clients virtually throughout the country. Schedule your free consultation today and learn how we can help you secure your financial future.




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