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The strange case of the disappearing pension

In the last few months I have met with a few prospective clients with the following pension scenario, which I’m sure to most would sound very straightforward.

  • Should I take a lump sum or monthly payments?
  • If monthly payments are better, should I take the single life or joint life?
  • And if joint life is better should I take joint and survivor 100%?  Joint & survivor 75% or some other percentage?
  • I have to make a decision in the next 3 weeks.

So maybe not so easy a question as we thought?  There seem to be some more wrinkles that need exploring. 

I have few questions of my own in response to the above query:

How long will you live?  Your spouse?  Are you currently collecting Social Security?  How much do you have in other ‘spendable’ assets?  How is your health?  Will you (or your spouse) need any amount of home care or assisted living before you die?  What is your expectation for inflation?  Do you plan to relocate to another state?  What type of home will you live in? Apartment? Current home? Townhouse?  Continuing care retirement community? Move in with adult children?  How comfortable are you with investing for your future?  Do you currently own investments that participate in the stock or bond markets?

Are the payments increased by cost of living adjustments?  Is the payment guaranteed by someone?  What happens if you elect the single life, take two months of payments and are killed by an out of control beer truck?  Will a joint & survivor option provide enough cash flow for the survivor if there is a beer truck disaster?  Do you have other life insurance?

Obviously this isn’t such a simple question to answer after all.  My concerns mostly lie in the area of continued availability of pension assets to fund expenses:  DON’T RUN OUT OF MONEY!  If you take one of the payment plans, will the payments keep up with inflation?  Will your ability to meet your ongoing cash flow diminish if payments don’t increase with costs over time?  Can you tell the electric company: “Sorry I can’t pay because my pension payments don’t cover all my expenses anymore?”  What if you elect a payment plan and your spouse dies first?  Will your payments ‘pop-up’ to what would have been your single life payment?

On the other side of the beer truck, if you elect to take the lump sum will you have the intestinal fortitude to invest the money appropriately given the need to outpace inflation knowing you will probably have to endure market declines?  Will the added flexibility of having your money under your control outweigh the risks?

So if you might eventually be faced with this question, my suggestion would be to get the due diligence and analysis done at least 6 months prior to needing to make a decision.  Don’t wait till the last minute, you do yourself and your family a disservice.  This might be one of the most important financial decisions you ever make.

For a free, no-obligation consultation click the “Book a Meeting” button on the right.

Thomas J Duffy, CFP®, MBA is a NAPFA registered fee-only financial advisor.  The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional association of Fee-Only financial advisors—highly trained professionals who are committed to working in the best interests of those they serve. Since 1983, Americans across the country have looked to NAPFA for access to financial professionals who meet the highest membership standards for professional competency, client-focused financial planning, and Fee-Only compensation.

Jersey Shore Financial Advisors LLC is a registered investment advisor in the State of New Jersey. Jersey Shore Financial Advisors LLC may only transact business or render personalized investment advice in New Jersey and international jurisdictions where we are registered/filed notice or otherwise excluded or exempted from registration requirements. The purpose of this video is for information distribution on products and services. Any communications with prospective clients residing in states or international jurisdictions where Jersey Shore Financial Advisors LLC is not registered or licensed shall be limited so as not to trigger registration or licensing requirements. Financial Advisors LLC is a registered investment advisor in the State of New Jersey. Jersey Shore Financial Advisors LLC may only transact business or render personalized investment advice in New Jersey and international jurisdictions where we are registered/filed notice or otherwise excluded or exempted from registration requirements. The purpose of this video is for information distribution on products and services. Any communications with prospective clients residing in states or international jurisdictions where Jersey Shore Financial Advisors LLC is not registered or licensed shall be limited so as not to trigger registration or licensing requirements.

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