GM Pension Plan Buyout
GM is offering its pensioners buyouts with a “value equivalent” lump sum payments. These offers need to be considered and analyzed against individual circumstances and financial goals. What called my attention to this announcement, which has become a common occurrence among companies seeking to rid themselves of the future obligation of providing lifetime pension payments, are the reasons many individuals are giving to justify their decisions. I think many of these reasons are misguided.
Company pensions provide lifetime income, or variations based upon decisions made when someone is about to retire. In most instances these decisions cannot be changed. Lump sum buyouts offer a pile of cash that can be transferred tax-free into an IRA account where the participant can make their own investment decisions.
Many people interviewed for a recent NY Times article indicated they like the lump sum alternative because it enables them to either leave a “nest egg” for their children, because it gives them the freedom of knowing they have the money and that this money is under their control. This is where I see problems.
The problem is that people lose sight of the purpose of the pension which is to provide cash flow during retirement. Having a lump sum rather than an assured lifetime cash flow makes people feel richer, but those feelings cannot be spent. Only cash flow can be spent. True, distributions can be made from the lump sum, but when that occurs, not only does the principal get diminished, but the cash flow can run out at some time. How and when that occurs depends on the ages of the participant, their spouse or partner, if married or in a civil union, the starting balance, withdrawal and earnings rates and costs.
This new desire to leave a “nest egg” can easily be satisfied with a life insurance policy. The fixed premium cost can come out of the pension payment. Control is ethereal and not a practical choice as can be seen by the following issues that need consideration:
- loss of a definite guaranteed cash flow
- ability to duplicate the amount of cash flow from the pension plan
- lack of financial knowledge
- capability to find a suitable investment manager and financial planner
- costs of management
- time that needs to be devoted to the portfolio
- construction of an appropriate asset allocation formula
- monitoring the formula
- making and timing decisions about rebalancing
- navigating the myriad choices in executing investment strategy
- vagaries of the markets
- probable lack of time needed to recover from severe market declines
- inability to mentally deal with the ups and downs that are a regular part of the markets
Note that there are other issues that can make you decide on the lump sum, but the point I want to make is to look at the big picture of the purpose and the use of the pension as it has a real effect on you.
Increased asset values are great, but you do not spend asset values, you spend cash flow!
For additional information, see my blogs dated Feb 15, Feb 24, Apr 12, May 3, May 8 and Jul 12. If you are considering a lump sum payout, make sure you understand everything I wrote in those blogs. If you do not, then enter a comment here and I’ll reply to you.
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