Three Questions To Ask Before Taking A Pension

As retirement approaches and you decide whether to take pension payments or a lump sum, the very important question to ask is this: How safe is my company’s pension plan?

The first corporate pension dates back to 1875, when the American Express Company began providing workers half their annual salary in retirement once they reached 20 years with the company. Shortly thereafter, utilities, banking, railroads, and other manufacturing companies also began providing pensions.

Once seen as an anchor in the three-legged stool of retirement, pensions have slowly been phased out over the last few decades as companies and government agencies look to cut costs and shift more of the retirement-saving responsibility to the employee.

Here are three questions to consider with you pension as you approach retirement.

  1. Should you take the monthly check or lump sum payment?

There are two distribution options available to retirees: You can take a lump sum distribution or monthly payments over your lifetime. The biggest question you need to ask yourself is: Will your employer meet its long-term commitments?

A lump sum gives you a large amount of cash now, but the total amount you receive could be lower than what you would be paid out if you were to stay in the plan. A monthly check gives retirees guaranteed monthly income for the rest of their life. However, you may only receive a portion of those payments should your company go bankrupt.

Other things to consider include spousal benefits and taxes. Some pensions offer spousal benefits, but if you take the monthly payment route and die soon after, those benefits potentially end there, depending on the option you choose. Additionally, if you take the lump sum and don’t roll over that money into an IRA, you will pay taxes on the distribution.

  1. How has the coronavirus impacted pensions?

Even before the coronavirus, government-backed pension funds were facing a shortfall: They don’t have enough money to pay out the benefits promised to retirees. Much of the funding for pensions comes from the stock market, and with Wall Street recovered from its pandemic lows, pension funds have been largely stabilized. Some private companies hit hard by COVID-19, most notably airlines, offered buyouts and early retirement packages to employees in an effort to cut costs. Some analysts anticipate that trend to continue with other pension-providing companies if they begin to struggle financially as well.

  1. If my company offers me a buyout, how do I determine which is right for me?

It’s important to think about your future because your retirement could look much different than you expect. More than three million older workers have left the labor force since the coronavirus pandemic began in March 2020. If you are offered a buyout, there are a couple of things you should ask yourself:

  • How much money is coming into the plan? Public pensions rely on a strong tax base, so if you live in a state that has a decline in income and sales taxes, it could create funding problems. If you have a private pension plan and your company doesn’t look to be profitable in the future, you may want to consider taking the buyout offer.
  • When will employees begin withdrawing from the plan? The average life expectancy in the U.S. is 77.3.1 The problem is Americans are retiring much earlier, and some pension plans begin paying out employees in their 50s.

We recommend meeting with a financial advisor to look at all your options so you can make informed decisions about your future.