What to Do If You Receive A Pension Buyout Offer
Carefully consider the terms of the deal and your personal situation before you make this important retirement decision.

The letter no doubt arrived unexpectedly.
A company you once worked for has an extraordinary proposal for you. You are due a monthly pension when you hit retirement age, but the company is offering to pay you a hefty lump sum right now to buy out your pension.
Do nothing, and your pension situation continues as is. Accept the buyout, and you'll have a large chunk of money to invest toward retirement. But you can no longer expect to get that monthly check the company had promised when you retire.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Suddenly, you have a major financial decision to make that could have a significant impact on your retirement.
Initially, you may even be puzzled about why that company you once worked for is so interested in buying out your pension.
Low interest rates represent one reason. Many of these pensions had anticipated that interest rates would be higher and that the money in the pension fund would be growing at a faster pace. These pension funds invest in equities and bonds just like you might in your 401(k)s and IRAs. According to Milliman 100 Pension Funding Index (PFI), as of April 2016, the 100 largest corporate defined benefit pension plans funding status dropped by $25 billion, leaving them underfunded by about 25%. With projected rates of return of more than 7% in order to succeed, you might see how this can become a problem.
Not to mention, people are living longer, too. That's great for you, but it means extra years of monthly payments that the pension folks hadn't counted on.
That combination has led most companies to try to get out of the pension game as quickly as possible. If every pensioner stays in in the plan, they are probably in trouble. They need to cut some costs and some liability.
So what should you do when that lump-sum offer arrives?
First, sit down with a trusted investment adviser who can provide you with some information and a consultation because there's no one-size-fits-all solution for everyone. The specific terms of the deal and your individual situation both play a role in whether you should accept the lump sum or hold steady and wait for that monthly pension check down the road. One of the most important things an adviser can do is provide you with the facts so that you can make your own decision. If an adviser simply tells you what you need to do, then they aren't doing their job, which should be to empower you to make your own decision. Otherwise, whose interests are they looking out for?
Take this example. Suppose your pension is set to be $2,000 a month. That might not sound like much, but it comes to $24,000 a year. Over 25 years of retirement, that's close to $600,000.
If you were going to take an annual withdrawal from your retirement savings you would need close to $400,000 at a 4% annual return to match the pension over 25 years.
So you need to take that kind of information into consideration as you weigh your decision. Is the lump sum large enough, or can it grow enough to provide you a similar annual return as those monthly pension payments would give you?
If it would take an 8% to 10% rate of return on the lump sum to give you a cash flow equal to the pension payments at your life expectancy, then you'll likely want to stick with the pension. On the other hand, if a low rate of return could provide that same cash flow, you might want to go with the lump sum.
Something else to factor into the decision is life expectancy. You can outlive a lump sum, but you don't outlive a pension. At the same time, you can't bequeath that pension payment to your children, but you could leave them the money in the lump sum.
For many people, the answer might be to take the lump sum and put it in an annuity with a guaranteed lifetime income benefit. That way they can guarantee themselves a steady income stream into their retirement years that could actually offer greater income than the pension, along with more flexibility and control over their money.
Another thing to keep in mind is the backing of the payments. While your pension is backed by the Pension Benefit Guaranty Corp. up to certain limits, your annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurer.
Regardless, when you're offered a lump sum, it's your responsibility to educate yourself about your options and evaluate your goals carefully.
Here are some good questions to ask yourself before making your decision:
- Do I have an emergency fund in case of the unexpected?
- How much income will I need to protect my spouse in case of death?
- Do I even need any more income from my investments?
- Do I need that income now or later?
- Are there concerns over the strength of my pension?
- Do I care what is left behind for my children or charity?
- And the most difficult of questions: How long will I live?
This could be one of the most important retirement decisions you make.
Don't take it lightly.
Casey B. Weade is an insurance professional and president of Howard Bailey Financial Inc. in Indiana and author of the book The Purpose-Based Retirement. Investment Advisory Services may be offered through Global Financial Private Capital, LLC, an SEC Registered Investment Advisor or Howard Bailey Securities, LLC, a Registered Investment Adviser.
Ronnie Blair contributed to this article.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Casey B. Weade is president of Howard Bailey Financial Inc. in Indiana and author of the book "The Purpose-Based Retirement." Weade, a financial professional, hosts The Purpose-Based Retirement radio and TV shows in the Fort Wayne area. He earned the prestigious Certified Financial Planner™ (CFP®) certification in addition to being a Retirement Income Certified Professional® (RICP®). He is also an Investment Adviser Representative (IAR), as well as life, accident and health insurance licensed and Long-Term Care Certified.
-
What About Those ‘Guaranteed’ Life Insurance Ads?
Guaranteed life insurance policies can sound tempting if you've been declined for insurance elsewhere. Here are four downsides and one alternative.
-
13 Answers to Pressing Social Security Questions
From smart claiming strategies for couples to tips on maximizing your monthly check, we have advice that can help you.
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the Fairway
Think of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
Just Sold Your Business? Avoid These Five Hasty Moves
If you've exited your business, financial advice is likely to be flooding in from all quarters. But wait until the dust settles before making any big moves.
-
You Were Planning to Retire This Year: Should You Go Ahead?
If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get It
The Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning Playbook
Consider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care Solution
If you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a Recession
Recessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income Planning
Once you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.