The other day GE announced that they will be offering many of its retirees a buyout of their pension. This is not something unusual and we’ve seen more and more of this over the last number of years. Not too long ago, Ford offered buyouts of its pension, and more recently, General Motors did as well. If you receive an offer from GE or, in fact, from any company that you have a pension with, you need to take the offer seriously and to not automatically decide one way or the other without doing some investigation. This is an important decision for your future, and you need to take your time in order to make the right decision for yourself.
Whenever a buyout is offered, generally the amount offered is substantial. All too often people are enticed by the number, which as far as I am concerned, can be a mistake. Obviously, the amount offered in a buyout is important, if nothing more to determine whether the offer is fair or not. In fact, one of the first things you should do when you receive a buyout is to determine if the offer is fair. You should not assume the buyout number is fair because unfortunately, in many situations it is not. Remember, in looking at an offer, keep in mind that the company is not doing this for your benefit, but rather for theirs. Your interest and the company’s interest don’t necessarily go hand in hand.
There are many times that it pays to accept the offer; however, my experience is that in the majority of situations an individual would be better off financially keeping their pension. The key if you do get a pension buyout offer is to focus on your individual situation, not what your next-door neighbor or your best friend is doing. One of the key questions that you need to ask yourself is what am I going to do with the money? For example, if you’re going to need income on a regular basis from that money, the question is how you are going to invest it. In my view, if you’re planning to invest it in things like CDs, government bonds or an annuity, you’re probably much better off keeping your pension. On the other hand, if you’re in a situation where you don’t need the income from the buyout, and you will invest the money in equities, and you are looking long term, it probably is best to accept the buyout.
Whether someone accepts the buyout or not is a difficult decision, and many people don’t have the knowledge or skill to make the decision themselves. Therefore, they may have to retain the services of a professional to help them. In that regard, make sure you hire a professional as opposed to a salesperson. The worst person to talk to about a buyout is a salesperson who is trying to sell you a product. The key is to make sure that you deal with a professional – someone who has your best interest, and only your interest at heart. When you deal with a salesperson, you don’t know if they’re operating in your best interest or theirs.
Whether it is the GE buyout, or a buyout from one of the automotive companies or, in fact, any company, you need to take time to analyze the proposal and to determine if it’s in your best interest. My advice: if you’re not sure what best works for you, it is probably safest to keep your pension.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.