Making Your Money Last

Beware Advice on Lump Sum Offers

If your pension plan gives you a lump sum option, get two or three opinions before taking the money.

Thanks to recent pension changes announced by the giant automakers General Motors and Ford Motor, tens of thousands of retirees are struggling with the complex choice between a lump-sum benefit payout and traditional monthly pension checks. They are also confronting a more unsettling question: Who can they trust for advice on this potentially life-changing decision?

For retirees receiving steady monthly pension income, a lump-sum payout that must be stretched over a lifetime can bring lots of headaches and few clear advantages. For financial advisers, however, the lump-sum offers provide an opportunity to win some new clients who are suddenly flush with cash -- and potentially earn asset-based fees or commissions by investing that money for retirees. And in a mad dash to offer advice on pension payouts, some financial advisers have stumbled over the facts. In some cases, they've downplayed the risks of taking a lump-sum payout, omitted some critical considerations for retirees facing this choice, or conflated terms of the Ford and GM offers.

Given tight deadlines for making pension payout decisions, retirees don't have time for bad advice. GM announced its lump-sum offer June 1, and retirees have until Friday, July 20, to make their choice. Ford, which announced its lump-sum offer in April, will give retirees a series of 90-day election periods starting as early as August. More employers are expected to offer lump sums to retirees in years to come as they seek to reduce the risks and costs of operating defined-benefit pension plans.

In the rush to offer pension payout advice, some advisers have trampled retirees' privacy. David Zukowski, a Morgan Stanley Smith Barney adviser in Birmingham, Mich., in mid July sent an e-mail to more than 1,200 people offering help in assessing the GM lump-sum payout option -- and leaving all of the recipients' e-mail addresses visible to everyone on the list. Zukowski declined to comment on the e-mail.

Retirees, of course, need to take a more thoughtful approach to pension payout decisions. In the August issue of Kiplinger's Retirement Report, the story "Retirees Mull Pension Lump Sum Offers" looks at some key considerations. And here are some tips for keeping a level head when bombarded by lump-sum hype.

You may easily outlive a lump sum. Financial advisers sometimes downplay, or completely ignore, this fact. On a page titled "GM Pension Payment Analyzer," the Web site of Mainstay Capital Management in Grand Blanc, Mich., recently included this statement: "By taking advantage of the lump sum pension payment option, GM retirees can potentially reduce many pension risks including longevity risk, tax risk and mortality risk."

Wait a second: Longevity risk? GM retirees who opt for a lump sum instead of a lifetime of monthly benefit checks are actually increasing longevity risk -- the risk of outliving their money. "I'm going to change that," Mainstay Chief Executive Officer David Kudla said when asked about the statement. The page was later revised to remove the reference to longevity risk.

While some financial advisers eagerly eye lump sums, retirees taking a sober look at their life expectancy are more skeptical. Ed May, a 68-year-old former Ford manager in Au Gres, Mich., says he spent 33 years with the company in part because of the promise of a secure retirement. Given his relatively young age and the longevity of his family, he's doubtful he'll sacrifice his pension's steady lifetime income stream. The lump sum, he says, "would have to be a pretty good offer for me to take a look at it."

Beware of copy-and-paste financial advice. Retirees know that all pension plans are not created equal. But financial advisers don't always bother with the details of each plan. On a page titled "GM Pension Information," InvestWise Financial's Web site recently listed considerations for GM retirees looking at the lump-sum offer, including "How confident are you in GM's ability to stay solvent and not default on your pension during your lifetime?" and "What monthly amount, if any, would the PBGC cover if GM defaults on pensions?" That's the same wording that appeared on InvestWise's site under "Ford Pension Information," just substituting "GM" for "Ford."

For GM retirees considering the new lump-sum payout offer, however, those questions miss the mark. GM has said that it plans to purchase a group annuity contract from Prudential Insurance, which would provide future monthly payments for retirees who don't take the lump sum. And the Pension Benefit Guaranty Corp., which insures private defined-benefit pension plans, won't back the Prudential payments. So current GM retirees should focus on the financial strength of Prudential, rather than on GM or the PBGC.

Asked about the information on the InvestWise site, senior partner Dean Thurman said, "That's something we should probably update now. That was written a while back."

Don't replace a good annuity with a bad one. Some advisers are recommending that retirees take the lump-sum payout and use it to buy annuities on their own. While that may earn the adviser a nice commission, it can be a dangerous path for the retiree. Individual annuities often offer lower monthly payments than retirees receive by sticking with their plan's monthly benefits. Retirees can use online calculators such as the one at www.immediateannuities.com to get a sense of the annuity income their lump sum might purchase.

A trusted financial adviser, to be sure, can offer valuable guidance. But retirees facing a critical pension payout choice may want to get second and third opinions -- and seek counsel from someone who doesn't have a financial stake in the decision. The U.S. Administration on Aging's Pension Counseling and Information Program, which offers free assistance to pension participants and currently serves 30 states, can help retirees sort through the pros and cons of various payout options. To find a counseling program in your area, go to www.pensionrights.org/counseling-projects.

Editor's note: Subsequent to our report that Mainstay Capital had removed the reference to longevity risk from its Web site, the firm reinserted a reference, noting that GM retirees choosing the lump-sum option could potentially reduce "longevity risk due to inflation." In a statement, a company spokesman noted that fixed monthly annuity payments that are not adjusted for inflation, "have less and less purchasing power over time" while a lump sum could be invested with the objective of outpacing inflation.

Most Popular

The 15 Best Growth Stocks for the Rest of 2022
growth stocks

The 15 Best Growth Stocks for the Rest of 2022

A sharp selloff in growth stocks this year creates opportunity for keen investors. Here are 15 top-rated picks to consider in the second half of 2022.
June 28, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Best Internet Banks
online banking

Best Internet Banks

These institutions operate fully online, which decreases their overhead costs and allows them to offer lower fees and higher rates than many other ban…
June 23, 2022

Recommended

How 13 Types of Retirement Income Get Taxed
retirement

How 13 Types of Retirement Income Get Taxed

When you're planning for retirement, it's fun to contemplate all the travel and rounds of golf ahead of you, but don't forget about taxes.
June 30, 2022
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
June 23, 2022
10 Most Tax-Friendly States for Retirees
retirement

10 Most Tax-Friendly States for Retirees

Moving to a low-tax state in retirement can help make your retirement savings last longer.
June 23, 2022
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus the District of Columbia, on how retirees are taxed. Some of the results might surprise you.
June 23, 2022