TAKING STOCK: Pension lump sum


Dear Mr. Berko:

I’ll soon be 68. I have worked for a large public company for 28 years and will retire at the end of December.

The company will give me $1,948 a month for as long as I live, and if my wife outlives me, it will give her $1,663 a month after I die for the rest of her life.

Now the company is giving me and a lot of other employees an interesting choice and is offering a lump-sum payout.

My lump sum would be $256,074 instead of the $1,948 a month.

If I took the lump sum, I could put it into an individual retirement account and buy stocks and bonds myself, and considering all the stocks and bonds yielding 10 to 20 percent or more, I should be able to do better than $1,948 a month.

We visited with a brilliant stockbroker who believes in buying high-yielding stocks and writing options on them.

He says that after commission costs, he could earn $2,500 a month for us, which would be $30,000 a year and much better than the pension plan.

We’ve looked at this from all angles. We think we have to take the lump-sum payout because we want more income and that broker’s plan could get us about $7,000 more a year.

We are writing you for two reasons.

Our adopted son of 39 years, who is a fan of yours, insists that we ask your opinion.

And perhaps you can recommend a money manager who could do better than $2,500 a month.

FS, Huntersville, N.C.

Dear FS:

Your son is your son; why are you compelled to tell me he’s adopted?

Meanwhile, do not — and I repeat, do not — accept the $256,074 lump-sum payout. It basically amounts to a bum’s rush.

The single best reason to stay the course is that you won’t earn the annual return on the lump sum that you think you can.

Even Jim Cramer, Bill Miller, Arapaho Jack and Warren Buffett agree.

The brokster you met is promising you $30,000 a year, which is a 12 percent average annual return, for the rest of your life.

That’s not possible in this market, in which pension plans such as CalPERS, New York state’s Common Retirement Fund and the Texas Municipal Retirement System are lowering their expected annual returns to about 6.5 percent.

So this brilliant meathead brokster is either a pseudologist smoking too much dope or an articulate incompetent who lacks a conscience and doesn’t give a fig if you lose your entire caboodle. And that might happen if you were to accept his advice.

Rather, you should be as pleased as a pasha in the pink with a guaranteed $1,948 monthly income.

Those 12 monthly payments will total $23,376 annually and provide a solid, attractive guarantee of 9.12 percent for as long as you live.

If you predecease your spouse, she’ll receive $1,663 monthly, or $19,965 annually, which is still a darn fine guarantee of 7.8 percent of that $256,074.

Both those returns are very difficult targets to reach in this stock market.

Thanks to the Federal Reserve’s ridiculously low interest rate policies, the liabilities of many company pension plans are ballooning.

Therefore, a growing number of companies are offering lump-sum pension payouts to remove the obligation from their books and reduce the costs of maintaining these plans.

However, in 2017, the IRS will adopt longer life span estimates, making it 22 percent costlier (in your case $56,000) for companies to offer lump-sum payouts.

So many companies will be following suit to take advantage of the two-year window before current life expectancy calculations are increased.

I know dozens of money managers who would promise you a 12 percent return.

But I don’t trust them, and I hope you won’t trust that bugger who wants to practice his doubtful stock management and option writing skills with your money.

Meanwhile, most retirees are offered lump-sum payouts, and the best rule of thumb is usually “forgetaboutit.” Individual investors almost always get the short end of the stick in a lump-sum payout.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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