By Vincent R. Birardi, CFP®, AIF®, Wealth Advisor at Halbert Hargrove
Since you’re reading this article (thank you and please keep reading!), you likely have a pension plan you’re relying on to provide financial support during your retirement years. Every holder of a pension plan is due hearty congratulations: These plans have largely become a vestige of a bygone era – along with Cabbage Patch Dolls, non-smart phones and VCRs.
Pension plans were the primary vehicle for retirement savings for U.S. workers up until the 1980s, with employers carrying the responsibility of saving and investing on behalf of their employees to meet their retirement savings needs. That changed during the Reagan Era with the introduction of the 401(k), which placed the retirement planning onus squarely on employees.
Between 1980 through 2008, participants in pension plans fell from 38% to 20% of the U.S. workforce, while employees covered by defined-contribution plans like 401(k)s jumped from 8% to 31%, according to the Bureau of Labor Statistics.[i] Today, only 15% of private-sector workers have access to one, according to the March 2021 National Compensation Survey from the Bureau of Labor Statistics (BLS).[ii]
Pension plan benefits can most often be taken as either a one-time lump sum payment or as a series of periodic payments – often annually – for a predetermined set of years.
How do you know which option is best for you? Here are three things to consider when making that decision.
- What are your future cash flow needs?
Do you have an adequate sense of what your expected annual expenses in retirement will be? What other sources of retirement funding besides your pension do you have to provide for yourself in retirement? Do you have a 401(k) plan? What are your projected Social Security benefits and when will you begin to claim them? Does your spouse/significant other have a different source of savings that you can pool together?
Each of these questions should be answered in a quantifiable way. Taken together, they can help you determine whether you are best served taking an upfront lump sum to address a savings shortfall or instead taking your pension benefit as a series of annual payments.
Do you have a significant expense – perhaps a balloon mortgage payment – that needs to be met in the near future? Perhaps taking a lump sum pension payment is your best option to satisfy this financial obligation. If however you have a series of future payment to make – such as college tuition assistance for a family member – then a pension annuity plan could be a good cash flow solution.
- The solvency of the pension plan sponsor
As referenced earlier in this article, the employer (aka plan sponsor) bears the legal responsibility of ensuring that the pension plan remains adequately funded to meet all future financial obligations. That said, the plan sponsor could potentially enter bankruptcy and be unable to meet those obligations.
It’s not all doom and gloom though. Your pension benefits are safeguarded by the Pension Benefit Guaranty Corporation (PBGC), the government entity that collects insurance premiums from employers sponsoring insured pension plans. The maximum pension benefit guaranteed by the PBGC is set by law and adjusted yearly. In 2022, the maximum annual benefit is about $74,455 for a 65-year-old retiree.
This guarantee is lower for those who retire early or if the plan involves a benefit for a survivor. And it is higher for those who retire after age 65.[iii] If you are concerned with your employer’s solvency then perhaps you should consider taking a lump sum payment. Again, let your personal circumstances dictate your decision.
- Your desire to control and manage your own assets
Opting to take a lump sum payment affords you the opportunity to invest the proceeds in a manner that will give you the most peace of mind. But bear in mind that you, not your employer, are then responsible for investing it to provide a return of capital that can last through your retirement years.
Obviously, what you decide to do could have huge implications for your future. A Halbert Hargrove Wealth Advisor in consultation with a Tax Planner can help you tackle all of these concerns to help you make the best decision for your particular set of circumstances.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.