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Buyout decisions have become increasingly common for those with a pension plan. If you get this offer, the most important questions to deal with include when you would you receive the payout, and how long you expect to live. The earlier you would receive a lump sum payout, the more it will be worth to you in retirement. On the other hand, the longer you live to collect monthly payments, they can add up to be higher over time. So as an example, if you’ve been offered $48,000 in exchange for waiving a $462 monthly payment, you may want to play the percentages and take a buyout if you’re above a certain age. Otherwise, monthly payments might be the preferable way to go
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A pension plan is a retirement benefit offered by some employers. Basically, it offers you a guaranteed amount of money every month starting in retirement and lasting for the rest of your life.
Increasingly, as a way of saving money, companies are offering their current and former employees an option known as a “buyout.” This means they’ll pay you a lump sum up front in exchange for any other payments. For example, you might have these two hypothetical choices:
Monthly Payments: $462 per month for life, starting when you retire
Lump Sum Buyout: $48,000 immediately, with no further payments
The question is, what should you do with an offer like this?
“There are a number of important points to evaluate before choosing either a lump sum or annuity payment,” Jeremy L. Suschak of DBR & Co. told SmartAsset. “First, the owner of the pension should consider their health. It is critical to think about this first since health-related factors could end up making the financial tradeoffs moot.”
Suschak raises an issue known as longevity risk. Essentially, the value of a monthly pension is based on how long you will live. You don’t need to worry about bankruptcy risk, as the federal government’s Pension Benefit Guaranty Corporation insures monthly payments well above $462.
For instance, say that you start collecting your pension at the age of 67. Someone in good health can potentially expect to live another 25 years, making this pension worth $138,600, at $462 a month over that time. But that may only be true for someone in good health. If you expect to live, say, another 10 years, then this same pension is worth just $55,440. So the healthier you are, the more this pension is likely worth.