Are pension plans becoming a thing of the past? According to the Pension Rights Center, only 13% of private-sector workers are participating in a pension plan. Since the 1980s, we have been seeing private companies and big corporations such as Federal Express, General Motors and most recently, General Electric, cut pension plans and offer buyouts to employees. Companies are moving away from defined benefit plans, such as pensions, to defined contribution plans like 401(k) plans.
So, what do you do if your company changes the terms of your retirement plan? You may be faced with the decision of accepting a lump sum or staying in the company’s pension plan. This is a decision that requires careful consideration, as both options have significant financial implications.
Staying in the Company’s Pension Plan: What to Consider
If you decide to stay in the company’s pension plan:
- Company Stability: Be sure in your confidence of the company’s ability to make future payments. If the company is unable to make future payments, the Pension Benefit Guaranty Corporation would step in, however, the company would only pay a certain portion of your promised benefits.
- Fixed Payments: Keep in mind, many pensions don’t have cost-of-living adjustments. This means the payment amount you’ll receive may be fixed for life.
- Spousal and Heir Considerations: In the event of your death (or your spouse’s) the plan’s obligation to you ends and non-spousal heirs would not receive the remaining benefits.
Taking the Lump Sum Buyout: Key Points to Remember
If you decide to take the lump sum buyout:
- Smaller Payout: 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 stay in the plan.
- Tax Implications: If you don’t roll the lump sum over to an Individual Retirement Account (IRA) or other qualified option, you’ll pay taxes on the distribution, which could reduce your payout.
- Investment Decisions: If you roll the money into an IRA, you’ll need to decide how to invest these assets to meet your income needs. This is something a Financial Advisor can help you with.
How to Choose the Right Option for Your Retirement
How do you know which choice is right for you? Before making a decision, consider meeting with a Financial Advisor, specifically, one that specializes in retirement planning. A Financial Advisor will explore all of your options with you and help you make the best decision for yourself based on factors such as lifespan, other sources of income, and investment strategies.
Get Expert Retirement Planning Advice
At Kowal Investment Group, our specialized focus on retirement has allowed us to proudly advocate for our clients for more than 30 years. Our advisors are ready to help you minimize risk and maximize potential, because at Kowal Investment Group, we all speak the same language: Retirement. Your successful retirement. Contact us at 262-522-4040 to learn more.
Any opinions are those of the financial advisor and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.
