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Taking your lumps

October 22, 2012

One noteworthy recent trend is presenting retiree and per-retirees with challenging financial decisions: companies offering lump-sum payouts to beneficiaries in lieu of defined benefit plans. Companies are not just making this option available to retiring workers, but in some cases to retirees who are already receiving payments. Two high-profile examples that we have seen so far this year are in the automotive industry: in April, Ford Motor Company announced that it would be offering 90,000 retirees a lump-sum payout, and in June, General Motors announced a similar plan would be offered to approximately 42,000 former employees. It’s trend I think is likely to continue, as more and more employers begin to appreciate the benefits of reducing their pension liabilities and cutting the cost of operating their defined benefit plans.

The big question, of course, for anyone faced with this offer, is whether it makes financial sense for you. It is a decision that should not be made lightly, as the choice can have a critical impact on your retirement security. It is important to think strategically when making this decision, resisting the “wealth illusion” that can make turning down a large amount of cash tough to do. One thing to think about is the fact that a recent rule change allows plan administrators to calculate lump-sum payouts using corporate bond rates instead of the 30-year treasury rates used previously, resulting in lower payouts.

The biggest factors in your decision, however, are personal. Think about your health status and life expectancy: if you are in poor health, consider the lump sum, but if your chances of living for several more decades look good, sticking with an annuity or defined benefit plan might make more sense. Consider the impact on your spouse, and take into account your spending habits and other sources of income. An annuity may allow you to invest more aggressively, while a lump-sum payment requires significant planning and the implementation of a bulletproof draw-down strategy for your investments to ensure that you can cover expenses without depleting your nest egg. One popular option that may be appealing for some is having your cake and eating it too: take the lump sum and talk to a financial advisor to set up your own annuity. This provides a steady stream of income, while ensuring that if you pass away early, your family will still be able to benefit from the remaining funds.

If you find yourself in this situation, I’m always willing to sit down with you and discuss what option makes the most financial sense for your family.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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