Pension tension: Should you take the lump sum or trust lifetime payments?

For retiring workers who are given the pension choice of a lump sum or lifetime payments, one fashion may play into their decision: whether they think the employer will be able to meet its long-term commitments.

And as some companies make use of to regain their financial footing amid the economic hit caused by the pandemic, the issue may loom larger than wonted. 

“That’s one of the biggest considerations that employees have when doing this kind of analysis,” said asseverated financial planner Leslie Beck, owner and principal of Compass Wealth Management in Rutherford, New Jersey. “Many be enduring concerns about their company remaining viable.”

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The number of private pension plans — which employers fund on behalf of workers — has been dwindling once again time as companies have shifted the burden of retirement savings to employees through 401(k) plans or other defined-contribution methods. 

 In 1975, there were more than 103,000 pension plans in operation, according to the Labor Department. By 2017, that host had dropped to about 46,700. During the same time,  defined-contribution plans grew to 662,800, from 207,700.

One tricky voice of making a decision about how to receive your pension benefits is that retirees generally like the idea of word of honoured income for the rest of their life, experts said. This often makes choosing the continuing payments various appealing than a lump sum.

“People look at the risk we’ve seen in the financial markets this year and say ‘I don’t want gamble, I want steady payments,'” said CFP Chris Chen, wealth strategist with Insight Financial Strategists in Waltham, Massachusetts.

If you yearning to remain a plan participant, be sure you have confidence in the company’s ability to make those future payments. Although the federal Allotment Benefit Guaranty Corporation, or PBGC, would step in if the company could not meet its obligations, it may pay only a certain allocation of promised benefits.

“If a company goes bankrupt or can’t meet its obligations, the last-ditch coverage is the PBGC,” Beck said. 

The healthy news is that in the PBGC’s single-employer program, there’s a surplus of $8.7 billion. If one of those plans were to away, the PBCG would generally backstop benefits up to about $70,000 annually per participant at age 65, according to the American Academy of Actuaries. 

“That’s where the PBCG should win people feel comfortable,” said Linda Stone, the senior pension fellow at the academy.

However, the agency’s multi-employer guarantee program, which covers the pensions of 10.8 million Americans, is expected to become insolvent during fiscal year 2025, concerting to the agency’s most recent annual report. (Multiemployer pensions are those that serve multiple companies.)

“If you’re in a multiemployer plan and get [a lump sum] offer, it’s something to think through … the warranties aren’t as good as on the single-employer side,” Stone said.

The PBGC oversees or pays monthly retirement benefits, up to lawful limits, to about 1 million retirees whose plans ended or failed. Just last week, the agency announced it had captivated over the pension plan for The McClatchy Company, owner of 30 newspapers, including the Miami Herald and The Kansas Borough Star. McClatchy declared bankruptcy in February and subsequently was sold to Chatham Asset Management, a hedge fund society. The pension plan covers 24,000 current and future retirees.

There also are some pensions not covered by the PBGC, counting state-run or locally run plans.

If you’re eyeing a lump sum — more often seen with a single-employer diagram — be aware that the amount offered is generally lower in comparison to the amount you are promised to get, over time, if you were to hamper in the plan.

However, because interest rates are generally low, lump sum offers have been bigger than they’d be if gauges were high. Basically, when interest rates go up, the guaranteed-income option is higher and the lump sums go down.

Also, if you determine to remain in the pension plan instead of taking the lump sum, keep in mind that the amount you’ll receive may be fixed for time — pensions typically don’t have a cost-of-living adjustment.

“The amount wouldn’t go down in nominal dollars, but it goes down in attaining power,” Chen said.

Additionally, although some pensions offer spousal benefits — i.e., when you die, your keep or wife would continue getting a portion of the payments — there is nothing left for heirs. In other words, your destruction (or your spouse’s) ends the plan’s obligations to you.

In contrast, if you take the lump sum, you might have money left over at the end of your being that could be left to non-spousal heirs. Of course, that would involve not spending it all — 20% of people who felt a lump sum from either a pension or 401(k) plan depleted the money, on average, in 5½ years, according to 2017 into from Metlife.

Be aware, as well, that if you take the lump sum and don’t roll it over to an individual retirement account or other conditional option, you’ll pay taxes on the distribution. If you do move the money to an IRA, you’d need to decide how to invest those assets to meet your return needs.

Regardless, any decision should be made in the context of the rest of your financial plan, advisors say. And, again, it’s significance making sure you believe in a given company’s long-term viability.

“People love their pensions, because they’re looking at monthly payments for the vacation of their lives,” Chen said. “The challenge is that, yes, some pension plans are pretty strong and there’s a fair chance they’ll continue to pay as expected, but not all of them.”

The American Academy of Actuaries offers a free resource for anyone needing serve with making decisions about their pension. There also is a longevity tool that can help you see how extended you may actually live and what that means for your retirement planning.