Should you take a pension or a buyout?

Written by
Peter Dunn


I’ve been retired since 2000. I'm receiving a pension now of $27,906 (gross annual), as well as Social Security for me and wife for an additional $33,000 (gross annual). I'm 68 and my wife is 67. My wife will get my same pension income, upon my death. The company for which I worked and retired from is offering a one-time buyout of $411,300. I can either take it and give up my pension payments, or I can just keep doing what I’m doing. If they go bankrupt in the future, am I in trouble? What can I expect from some pension guaranty, if there is one? The best part of my financial life is having zero debt, but I have high monthly medical monthly expenses (between $1,100-$1,500 per month). The worst part is that I have zero assets, other than my car. I’m nervous about taking the payout because I lost about $200,000 in my 401(k) plan back with the tech stock failure of 2000, while I was in the midst of retiring. After the tech stock fall, I had $47,000 left, which went to taxes on some money to move back to Indiana and high medical bills through the years. What should I do?

— Harry

Harry you are faced with a very tough decision. A decision which impacts the rest of your life. I'm glad you emailed me.

Let's lay out your options:

1) Take the buyout of $411,300 and mange it yourself

2) Take the buyout of $411,300 and hire someone to help you manage it

3) Continue receiving your pension of $27,906 annually

I made the distinction between managing the buyout yourself and having it managed for you because of what happened to you in 2000. A good advisor could prevent you from losing 80 percent of your money. Managing it yourself could lead to decisions based on fear of what's happening in the market. You will also have an issue recreating the amount of money you receive per year currently from your pension. To extract $27,906 from a lump sum of $411,300 would be 6.8 percent per year. I generally recommend around 4 percent or less. The risk of running out of money when taking 6.8 percent a year is real.

As you mentioned, there is also risk in continuing to receive your pension as is. Pensions fail. To fear this happening to you is reasonable. But the Pension Benefit Guaranty Corporation (PBGC) does include your company (which I won't mention). Their website offers more information on what they cover in the event your pension does fail.

I can't make your decision for you, but I know if it were me, I'd choose to continue receiving the pension.

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