Pacific Grove, CA Be Cautious About Employer Offers Of Pension Buy Outsby Richard Kuehn on 08/06/12
General Motors recently launched a plan offering 42,000 of its 118,000 salaried employees a lump sum payment if they would give up their pension plans. Shortly thereafter, Ford Motor Company did something similar with employees which had already retired. Many financial advisers think this will become a long term trend, with the companies that still have traditional pension plans trying to get employees to give them up for a cash payment. Be careful when making a decision like this, and do it in conjunction with a financial advisor. Many people are still cash-strapped after the recession and will be tempted by the thought of a big check. But companies that are doing this are doing it for a good reason. They believe the lump sum payment is worth less than what you will collect over your lifetime from pension payments. One financial analyst interviewed for the Wall Street Journal said that getting a lump sum gives you more flexibility because you may be able to invest in something which grows more quickly than inflation. However, we have all witnessed the fact that investments can go down in value significantly, so investing it yourself may raise the risk profile. She said that for most people, keeping the pension is the best option because it provides certainty in your income. If you are made a buy-out offer, it needs to be analyzed by a professional that can do a cost benefit analysis, comparing a cash payment with a stream of deferred payments. Keep in mind that even these won't be 100% accurate because the financial advisor will have to assume a certain rate of return on investments which may or may not be achieved. So think long and hard before making a decision that you will have to live with for the rest of your life.