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As of May 20th, 2019, Ford Motor Company plans to cut 7,000 salaried workers by the end of August 2019. If you happen to be one of those 7,000 workers, you're likely facing the biggest financial decision of your life, so it's critical that you take your time to educate yourself and pick the best possible option for you and your family.
Some retirees want to spend as much money in retirement as possible, without the worry of running out of money; in that case, the pension makes sense. Some want the control, flexibility, and the option that this money will provide for their family for generations to come; in that case, the lump sum makes sense.
As you are facing this crucial life decision, here’s a common sense guide to get you started down the right path:
DO: Plan Ahead. This is a major life decision that naturally comes with stress and anxiety. This is a decision you need to take your time with and make sure you understand your options. Before you decide, I suggest consulting with a financial advisor to run preliminary retirement income projections to compare how your retirement would look with these two different options.
When you’re making a decision of this magnitude, the financial advisor you consult with should operate as a fiduciary, not a suitability advisor who can act in a self-serving capacity. A fiduciary is a higher-level financial planning standard in which they must provide advice that’s in your best interest.
DO NOT: Follow the Herd. In the world of finance, many times the popular choice is the exact wrong choice! This is a highly personal decision unique to you. What your co-workers are doing should have no impact on what you’re doing. Sure, you can discuss it with them, but don’t elect an option just because it seems to be the popular choice.
DO: Diversify Your Portfolio. If you take the pension payments, you should factor this into your overall asset allocation, as you essentially have a large portion of your portfolio in an annuity, which gives you a guaranteed income stream over your lifetime. You may be able to be more aggressive with the remainder of your portfolio. If you take the lump sum, you may want to diversify beyond a typical stock and bond portfolio. You should consider alternative strategies like real estate and annuities to provide diversified income streams that are less reliant on the market.
DO NOT: Bet the Farm. If you take the lump sum, the last thing you should do is dump it all into the market, especially if you are going to be relying on this money for consistent income. The number one risk facing retirees is sequence of returns risk, or what I like to call luck of the draw. This is out of your control, and simply means if you catch a down market when you retire, the odds of you depleting your assets over your retirement are significantly higher. The only way to combat this, besides not taking income, is to be more conservative with your investments. That doesn’t mean you shouldn’t own equities; it means you need to make sure you’re not overexposed to equities.
DO: Plan for Future Uncertainties. For an age 65 couple retiring today, there is a greater than fifty percent chance that one of them will make it into their nineties. A lot can happen over a two to three decades. First and foremost, the value of a dollar will be significantly less due to the eroding power of inflation. So that five thousand per month budget you’re living on today, may require ten thousand dollars in your later years of retirement, as the value of the dollar will be diminished.
Another uncertainty is taxes. We can all agree that taxes are likely to be higher in the future. If you take the lump sum, this adds to your pre-tax assets like your 401(k) and IRAs and represents a huge tax time-bomb. The Secure Act is a retirement bill that has recently passed through the House of Representatives, which could have a profound impact on how much of your pension Uncle Sam gets. The Secure Act would eliminate the Stretch IRA, forcing your beneficiaries to take the pre-tax money over ten years, rather than over their life expectancy.
DO NOT: Underestimate Long-Term Care Costs. Think of long-term care (LTC) costs as the glacier that sank the Titanic. If you don’t plan now, there’s not a heck of a lot you can do once a LTC situation arises. A good retirement plan can easily be destroyed by these costs. There are a few ways you can plan for this, both with the income generated by the pension, or by generating income from the lump sum itself. The first way is purchasing LTC insurance. Many retirees do not like this option as it’s expensive and continues to increase in cost.
The second, is simply self-insuring. It’s what you’re doing by default. This involves setting a portion of money aside for these future costs, letting it grow, and if it’s not needed it transfers to your beneficiaries. The last way to plan for these costs, is by adding an enhancement to a life insurance or annuity policy. A life insurance policy with a chronic care rider would give you access to the death benefit if a healthcare event were to occur. An annuity with a healthcare rider would enhance your income payment, perhaps double it, if a healthcare event were to occur.
DO: Take a deep breath. This is a major life decision and needs to be part of a well-thought-out plan. It’s important to get with a qualified financial advisor to help walk you through this process. It’s not everyday you have to make a decision of this magnitude, so take your time, do your homework, and get it right!
We’ve put together several resources to help with this decision:
Get the book on Amazon: The Autoworker’s Guide to Lump Sum Pensions: 5 Crucial Decisions Retirees from Ford, General Motors, and Fiat Chrysler Want to Get RightFeature in Kiplinger: Pension Payments or Lump Sum? Take Your Time to Get It RightListen to The Paul W Smith Show: Rich Discusses the Autoworker’s Guide on the Paul W. Smith Show
Schedule a complimentary Pension Lump Sum Evaluation with one of our financial professionals.