3 Questions to Ask Before You Take a Pension

As retirement approaches and you must decide whether to take pension payments or a lump sum, the first very important question to ask is this: How safe is my company’s pension plan?

A broken piggy bank.
(Image credit: Getty Images)

The first corporate pension dates back to 187 (opens in new tab)5, when the American Express Company began providing workers half of their annual salary in retirement once they hit 20 years with the company. Shortly thereafter, utilities, banking, railroads and other manufacturing companies also began providing pensions.

However, problems quickly developed after companies went out of business, leaving workers without retirement benefits. This brought about one of the most significant pieces of retirement legislation with the Employee Retirement Income Security Act (ERISA) (opens in new tab) of 1974. It made pension plans more secure by establishing regulations for employer-sponsored retirement plans.

Once seen as an anchor in the three-legged stool of retirement, pensions have slowly been phased out over the last few decades as companies and government agencies look to cut costs and shift more of the retirement-saving responsibility to the employee.

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Here are three questions to consider with your pension as you approach retirement.

Should You Take the Monthly Check or Lump Sum Payment?

There are two distribution options available to retirees: You can take a lump sum distribution or monthly payments over your lifetime. The biggest question you need to ask yourself is: Will your employer be able to meet its long-term commitments?

A lump sum gives you a large amount of cash now, but the total amount you receive could be lower than what you would be paid out if you were to stay in the plan. A monthly check gives retirees guaranteed monthly income for the rest of their life. However, you may only receive a portion of those payments should your company go bankrupt.

Other things to consider include spousal benefits and taxes. Some pensions offer spousal benefits, but if you take the monthly payment route and die soon after, those benefits potentially end there (opens in new tab), depending on the option you choose. Additionally, if you take the lump sum and don’t roll over that money into an IRA, you will pay taxes on the distribution (opens in new tab).

How Has the Coronavirus Impacted Pensions?

Even before the coronavirus, government-backed pension funds were facing a shortfall (opens in new tab): They don’t have enough money to pay out the benefits promised to retirees. Much of the funding for pensions comes from the stock market, and with Wall Street recovered from its pandemic lows, pension funds have largely stabilized (opens in new tab). Some private companies hit hard by COVID-19 last year, most notably airlines, offered buyouts and early retirement packages (opens in new tab) to employees in an effort to cut costs. Some experts anticipate that trend may continue with other pension-providing companies if they begin to struggle financially as well.

New trends in the way pensions are being overseen are also creating additional concerns. More private companies are seeing financial benefits by selling their pension plans to insurance companies (opens in new tab). Some advocates say this can be risky because insurance companies tend to not have the same government-backed protections in place. Critics also question whether these companies are more concerned about quick profits rather than long-term stability.

If My Company Offers Me a Severance Package or Buyout, How Do I Determine Which Is Right for Me?

It’s important to think about your future, because your retirement could look much different than you expected. More than 3 million older workers have left the labor force (opens in new tab) since the coronavirus pandemic began in March of 2020. If you are offered a buyout, there a couple of things you should ask yourself:

  • How much money is coming into the plan? Public pensions rely on a strong tax base, so if you live in a state that has seen a decline in income and sales taxes as a result of the pandemic, it could create more funding problems for already cash-strapped cities and counties. If you have a private pension plan and your company doesn’t look to be profitable in the future, you may want to consider taking the buyout offer.
  • When will employees begin withdrawing from the plan? The average life expectancy in the U.S. is 77.3 (opens in new tab). The problem is Americans are retiring much earlier, and some pension plans begin paying out employees in their 50s.

I recommend meeting with a financial adviser to look at all your options so you can make informed decisions about your future.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Tony Drake, CFP®, Investment Advisor Representative
Founder & CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates (opens in new tab) in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.