“The right decision can be a retirement game-changer – and so can the wrong one,” cautions Ed Slott in Financial Planning magazine, referring to the choice many employees are given between a lump sum buyout and a pension. As estate and elder law attorneys, we not only agree, but realize that the buyout vs. pension decision has the potential to “change the game” for more than just one generation.
How does a lump-sum buyout (AKA lump-sum window) work? Employees who have not yet retired but who are enrolled in defined benefit pension plans are being offered the opportunity to elect a lump sum distribution in exchange for giving up future periodic payments.
Factors to consider, Slott advises, include the following:
the amount of the lump sum
Buyouts often come in the form of a lump-sum distribution that represents the present value of an employee’s future pension payments.
the financial health of the plan sponsor
“General Electric is the latest company to offer a pension buyout to former employees as it tries to shore up its pension plans, which were $27 billion underfunded.If there’s a concern about a company’s future solvency, an employee may be better off taking a lump sum,” writes Gia Curci in Investment News.
the ability of the client to handle large sums of money
“Clients in their 40s with an aggressive risk tolerance may be more likely to invest a lump sum and generate more future income than they would get from the pension plan,” Curci observes.
consent to the decision by the spouse
A married participant’s benefit must be paid in the form of a qualified joint and survivor annuity – unless the participant elects another form of payment and the spouse consents.
If the decision is made in favor of a lump sum, pension rollover rules apply. If the money is rolled over into a traditional IRA account, Required Minimum Distributions can now be deferred until age 72. Careful estate planning will involve the choice of primary and contingent beneficiaries.
Individuals age 70 ½ and older may make direct transfers of up to $100,000 per year (and up to $200,000 per married couple) from individual retirement accounts to qualified charities without having to count the transfers as income for federal tax purposes.
The decision to take a buyout can certainly be a game-changer, not only for the retiring employee, but for generations of family members!
– by Rebecca W. Geyer