To reduce risks and costs of pension plans, some companies are offering lump sums to former employees and retirees currently getting monthly pension payments. By Eleanor Laise, Senior Editor July 19, 2012 EDITOR'S NOTE: This article was originally published in the August 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.As workers head off into retirement, many pension plans offer them a choice between a lump-sum benefit and a lifetime of annuity payments. But a growing number of employers are now considering offering lump sums to people who left the company years ago -- including retirees currently getting monthly pension benefits. SEE ALSO: Beware Advice on Lump Sum Offers Employers are using lump-sum offers to current retirees as a way to reduce the risk and cost of operating their defined-benefit plans. In April, for example, Ford Motor said it would offer about 90,000 retirees, former employees and beneficiaries the option to take a lump-sum pension payout. And in June, General Motors said it would make a lump-sum offer to about 42,000 salaried retirees and beneficiaries. Advertisement More retirees -- including some who weren't offered a lump sum at the time of retirement -- are likely to face this difficult choice in years to come. Over half of corporate finance executives surveyed late last year by CFO Research Services said their pension plans are likely to offer lump sums to terminated, vested participants in the next two years. "We're definitely seeing plan sponsors look at expanded use of lump sums in all ways, shapes and forms," says Matt Herrmann, head of the retirement risk management group at consulting firm Towers Watson. The choice between a lifetime annuity and a lump-sum payout can have a critical impact on retirement security. Before deciding to end your monthly income stream, you must weigh personal factors, including health status and desire to leave money to heirs. Such careful deliberation requires a resistance to the "wealth illusion" that makes many people leap at the chance to grab a lump sum. The big pot of money "makes you feel rich," says Steve Vernon, president of retirement education firm Rest-of-Life Communications, in Oxnard, Cal. "People like seeing a lot of money in their account and don't understand how much it takes to generate income for the rest of your life." Employers say that lump-sum offers can benefit participants. In announcing its lump-sum option, for example, GM said that retirees would have more "flexibility" to manage their retirement funds. But lump sums' advantages for retirees are murky at best, whereas their benefits for employers are crystal clear. Lump-sum payouts help employers reduce their risk as their pension obligations bounce around with market shifts and interest-rate changes. And by cashing out participants, plans can trim operational costs such as sending out annual funding notices. Advertisement Some factors that are now making lump sums more attractive to employers are making them less beneficial to retirees. Under a recent rule change, administrators can calculate lump-sum payouts using corporate bond rates instead of the 30-year Treasury rates previously used. All else being equal, the shift to a higher interest rate will result in lower lump-sum payouts. Is It Worth Switching to a Lump Sum? When evaluating a lump-sum offer, start by considering your own life expectancy. Plan administrators generally use average life expectancy data to translate benefits into a lump sum. That tips the scales toward a lump sum for people in very poor health and toward an annuity for those of average or better health. Women, who have a longer average life expectancy than men, should be particularly wary of taking a lump sum. And married retirees, who often have annuities that provide benefits for the surviving spouse, should consider the challenges of stretching a lump sum over both spouses' life expectancies. Look at the impact of a lump sum or annuity on your overall portfolio. Investing your lump sum with the hope of generating more income than the annuity comes with significant stock-market risk. With the annuity, however, you might combine your monthly pension benefits with Social Security and any other steady sources of income to cover your basic expenses, allowing flexibility to invest more aggressively in your IRA or other savings vehicles. If the market implodes, your basic expenses would still be covered. Advertisement What's more, if your annuity and other steady income sources are sufficient to cover your living expenses, you don't need an elaborate plan for drawing down your portfolio in retirement. But retirees switching to a lump sum will need a bulletproof drawdown strategy that lets them tap enough cash to cover expenses without depleting the nest egg. Risk-averse retirees who take lump sums often withdraw far less than what the pension annuity would have provided, crimping their retirement lifestyle and leaving a pile of cash behind when they die, Vernon says. Others draw down too much and run out of money. That's the risk that former GM engineer Keith Meintjes aims to avoid by sticking with the monthly pension benefits he's received since retiring in 2008. In June, the 61-year-old received his lump-sum offer from GM -- an option he wasn't given at retirement. He checked annuity rates and realized that the pile of cash couldn't purchase the same guaranteed lifetime income stream that he gets through his monthly benefits. "Running out of money during retirement is a potential disaster," says Meintjes, of Waterford, Mich. Meintjes calls the lump-sum offer "an incredibly dangerous thing," because retirees will be tempted to take the cash and plow it into risky investments. To check the annuity value of your lump sum, go to www.immediateannuities.com. Retirees who are particularly focused on tax management or leaving money to heirs, however, may be drawn to the flexibility provided by a lump sum. The lump sum is generally rolled into an IRA, and the retiree can draw more cash from the account when income-tax rates are lower, and less when they're higher. The annuity doesn't offer such options. And the annuity typically can't be passed down to children. Advertisement But given the uncertainties of managing a lump sum in a volatile market, Leon LaBrecque, a financial adviser in Troy, Mich., who works with Ford and GM retirees, says he's seeing most of these clients steer clear of lump sums. "People who are living on this money, who really need it and don't have other sources of money, are staying with the annuity," and declining the lump sum, he says. Plan participants typically face an all-or-nothing choice between a lump sum and an annuity. But a U.S. Treasury proposal announced earlier this year would make it easier for plans to offer a combination of the two options. The aim is to encourage more retirees to consider the steady lifetime income that comes with partial annuities, while allowing them to keep some savings in easily accessible accounts.