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Retirees and salaried employees at Ford and General Motors are being offered lump sum “buy outs” from their pension plans. This is a significant decision that has many implications (retirement, taxes, estate planning, etc.) and should be done after careful consideration and after seeking advice.
About 98,000 Ford salaried retirees and former employees have or will soon (throughout 2012 and 2013) decide whether they want to get a pension check each month or “cash out” and take a lump sum of money. Ford recently announced this move to offer a lump-sum option to a select group of salaried people as an alternative to a traditional pension. Election periods will be based upon a random selection process. Unfortunately, time is of the essence as individuals getting this offer (Ford calls it a “Election Kit”) will have only 90 days from the date they receive the offer to make this all important decision.
The program is designed to limit Ford’s so-called “legacy costs.” General Motors is making a similar offering to 42,000 salaried employees with a similar goal in mind.
The exact lump sum amounts offered will vary. However, some financial planners say that some people who are in their late 50s and have been at Ford for decades could be offered payouts of $300,000 or $400,000, or more.
Before making this decision, the individual needs to understand the amount of lump sum they will receive and how much income they will need to generate in retirement.
This is because by taking a lump sum, the individual is assuming the investment risk (of running out of money).
By the same token, taking the lump sum can give the individual more options to manage the money and withdrawing it in retirement as they desire. It can have significant estate (and tax) planning implications as well because the lump sum received becomes an asset of their estate should they die (versus the pension option which is simply a lifetime income stream).
Bottom line: the individual should consult with a qualified financial and legal advisors who can help determine their needs by looking at their objectives, assets, liabilities, cash flows, health, life expectancy and other factors. Indeed, in Ford’s initial announcement they encourage such individuals “to consult with a financial planner and/or tax advisor as soon as possible so you have time to discuss your personal situation and consider your options before making your election.”
Our firm has relationships with financial advisors who can properly evaluate all of the factors that are to be considered, while our firm can assess the tax and estate planning implications to help you make an educated decision. If you are faced with this important decision, please give our office a call to schedule an appointment to go over your situation.
