Q Dear Rick:

I have a situation I hope you can help me with. I am in my mid 60s and will be retiring at the end of the year. My company has offered me a buyout on my pension. I had my accountant look at the numbers and he thought that the buyout number was fair. My question to you is what things should I consider in deciding to take the lump sum or to take the pension? You should know that I am a conservative investor and in addition to my pension I have about $250,000 in my 401(k) and another couple hundred thousand dollars in investments outside of my retirement accounts. The way I figure it is that my pension plus Social Security, along with about another $500 a month should more than cover my living expenses.

Thanks.
Jeff

A Dear Jeff:
In reviewing your situation I like what you initially did. You talked to someone to make sure that at least the computation on the lump sum was fair. I always think that is one of the first things people should do. On the whole, most companies are fair when it comes to buyouts; somewhat surprisingly, there are many companies that are very generous. On the other hand, not surprisingly, there are companies that are not employee friendly when it comes to buyouts.

The first thing you need to look at is your individual situation. What type of investor are you. Are you the type of investor who is going to take this money and invest it in things such as CDs and U.S. treasuries, or are you an investor who accepts volatilities and is willing to invest the money long term? If you’re the type of investor who is going to invest the money in things such as CDs and U.S. treasuries, then it leans towards not taking the buyout. On the other hand, if you’re the type of investor who accepts volatility and risk and can keep the money invested for the long term, taking the buyout generally makes more sense.

Another issue you need to consider is when you are going to need income from the money. If you need the income currently to cover your living expenses, it leans more toward the pension. On the other hand, if you do not need the income for a number of years and you can let the money continue to reinvest and grow, then it leans toward taking the buyout.

In reviewing your situation I would not take the buyout. I believe you would be better off to take the pension as opposed to the lump sum. My view is that because you will currently need the income and you are a conservative investor, it makes more sense to take the pension.

One last note and that is it is important that you invest some of your other money for long-term growth. I believe your cost of living will go up, not down and having money invested for long-term growth will protect you.

Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com