Buyout decisions have become increasingly common for those with retirement plan. If you receive this offer, the most important questions to address include when you will receive payment and how long your life expectancy will be. The sooner you receive a lump sum payment, the more you will earn in retirement. On the other hand, the longer you live to collect monthly payments, the more they can accumulate over time. So, as an example, if you were offered $48,000 in exchange for forgoing a monthly payment of $462, you may want to play around with the percentages and do a buyout if you’re over a certain age . Otherwise, monthly payments might be the preferable solution.
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Should you accept lump sum payment or monthly payments?
A pension plan is a retirement benefit offered by certain employers. Basically, it offers you a guaranteed amount of money every month start retirement and that lasts for the rest of your life.
Increasingly, in order to save money, companies are offering current and former employees an option known as a “buyout.” This means they will pay you a lump sum in advance in exchange for any other payment. For example, you might have these two hypothetical choices:
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Monthly payments: $462 per month for life, starting at retirement
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Lump sum redemption: $48,000 immediately, with no further payment
The question is: what to do with an offer like this?
“There are a number of important points to evaluate before choosing between a lump sum payment or an annuity,” said Jeremy L. Suschak of DBR & Co. » said SmartAsset. “First of all, the pension holder should consider their health. It is essential to think about this first, as health-related factors could ultimately make financial compromises moot.”
Pension value is based on longevity
Suschak raises an issue known as longevity risk. Essentially, the value of a monthly pension depends on how long you live. You don’t have to worry about the risk of bankruptcy because the federal government Retirement Benefits Guarantee Corporation ensures monthly payments well above $462.
For example, let’s say you start get your pension back at the age of 67. A healthy person can potentially expect to live another 25 years, bringing that pension to $138,600, at $462 per month during that time. But this may only be true for a healthy person. If you expect to live another 10 years, say, that same pension is worth only $55,440. So the healthier you are, the more valuable this pension is.
Longevity risk and your personal risk tolerance are important things to understand when making a crucial decision for your next retirement. A Financial Advisor can help you understand these terms and make a plan for the future.
Flat rate value is based on payment date
Let’s assume you have no cost of living adjustment on the retirement annuity and no rate of return on the lump sum payment. Then, at $462 per month and $5,544…
