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Updated Saturday, November 24, 2012 at 10:01 PM

Don’t jump for lump-sum offer

By Scott Burns
Syndicated columnist

Investing

Q: Like many others, I recently received a “one-time-only offer” for a lump-sum distribution as a settlement for a vested defined-benefit pension.

I am 58 years old. The lump-sum offer is $250,000. The normal annuity benefit starting now is $1,489/month. At age 65 it would be $2,089.

If I take the distribution and buy an annuity with Fidelity, the monthly benefits are $1,185 and $1,700, respectively.

I calculate that the “offer” is asking me to take a 20 percent haircut on my pension! Of course, I can simply take my normal monthly benefit through the pension.

But if I do that, I am accepting the risk of a future default by my former employer. If that happens, my future benefits would be at the mercy of the Pension Benefit Guaranty Corp.

Is it worth 20 percent to eliminate the default risk of the normal pension plan?

A: First, take a close look at the company you work for and the financial condition of the pension fund. If the company is profitable and the pension fund is well-funded — at least 80 percent — then you should stick with the company plan and not take the haircut.

Your next step is to assess your second line of defense: the Pension Benefit Guaranty Corp. For 2012, the maximum monthly benefit under the PBGC for a 58-year-old, according to its website, is $2,652. That’s well above the $1,489 you cited for your earned benefit.

The PBGC guarantees fundamental benefits earned before the termination date of the plan or by the date of the company’s bankruptcy proceeding. In the event of such events, you are likely to lose health and welfare benefits, vacation pay, severance benefits, etc. — but your basic lifetime pension income will be safe.

Bottom line: If your company plan is close to fully funded, you’re better off sticking with your company pension.

Q: I am 86 years old. I rent an apartment for $3,100 a month plus utilities. The total averages $3,400 monthly. I’m considering moving into an all-inclusive retirement community. The average monthly fee is $4,000.

My monthly income is $12,000 from a combination of Social Security and a company pension. I have about $1.3 million in financial assets.

A: You’ve made a good decision; the continuing-care retirement community (CCRC) model is a good one. I wish more seniors would consider it, although many balk at the monthly expense.

Questions: scott@scottburns.com

Copyright, 2012, Universal Press Syndicate






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