Pension and Wealth Management: Should I Take a Pension Buyout or Stay in the Plan?

Pensions were once a cornerstone of the American workforce. Millions of Americans banked on the promise of a comfortable retirement after years of service as an employee. But the future of pension guarantees is gradually becoming increasingly difficult to fulfill.

Before COVID-19, a number of the nation’s pensions were already in jeopardy. Now, the far-reaching economic effects of the pandemic are another blow to the longevity of corporations and company pensions.

Pension plan participants, unfortunately, will bear the brunt of economic uncertainty and may eventually come to a fork in the road: Take a lump sum buyout or a partial buyout along with a lower monthly payout, or roll the dice and plan to receive payments for life – if the pension can last.

These are special concerns when it comes to a pension and your personal wealth management, so it’s important to discuss your situation with a fiduciary financial advisor who understands these unique retirement plans. At Linscomb & Williams, we've worked over the past 50 years with many clients who depend on a pension in retirement. Here are a few facts that can help.


Retirement planning can be complex. Contact Linscomb & Williams to see how we can help.


The Decades-Long Decline of Pensions

Market ebbs and flows, plus the lower liability that 401(k) plans offer to sponsoring corporations, have been lowering the appeal of pensions for decades. According to the Department of Labor, the number of pension plans offering guaranteed payments (defined benefit) has decreased 73 percent since 1986.

What’s more, almost two-thirds of corporations are considering terminating pension plans or will no longer be offering existing plans to new participants within the next five years. The Coronavirus has only made matters worse. This year, if pension plans experience poor returns, say from 0 to 15 percent, unfunded pension liabilities could increase significantly to $2 trillion. And, even if returns for 2020 do not end up being poor, the lower interest rate environment tends to magnify pension under-funding issues.

Some of Texas’ biggest pension plans would add billions to their funding shortfall if they obtained negative returns.

Pension chart

Source: Reason Foundation

Pension Buyouts Will Likely Increase Going Forward

Previously, pension sponsors were barred from offering buyouts to plan participants who already began receiving benefits, per IRS guidelines. But a new 2019 IRS notice retracted this rule, so corporations can now offer buyouts to participants currently receiving monthly payouts. Increased economic uncertainty is also pushing corporations to look for ways to lower or remove pension liabilities.

This means you’re probably more likely to receive a pension buyout going forward, and there’s a good chance that the amount you receive from the buyout will be lower than the amount of your lifetime benefits. Nevertheless, here are important considerations when deciding between a buyout and lifetime payments.

5 Key Financial Considerations When Assessing a Pension Buyout

First and foremost, a buyout offer is only an offer. You are never obligated to accept a pension plan buyout. Though the letter you receive may attempt to entice you with a large dollar amount, the choice is still yours. Keep your retirement plan in mind, talk with a fiduciary financial advisor who understands a pension and wealth management, and let your financial goals drive your decision-making. Most important here is to avoid getting conflicted advice about such an important move from a "financial advisor" who's primary goal is the sale of a related financial product, once you receive the buyout money.

1. Your Retirement Income Needs

Retirement income is at the core of your pension. If you say no to a buyout, you are electing to receive monthly payments for life. Monthly payments supplement your retirement income sources like Social Security and retirement accounts, which can greatly improve or prolong your standard of living during retirement.

For retirees who are concerned about their savings coming up short, rejecting a buyout and choosing monthly payments can be very helpful. Knowing your monthly income beforehand makes planning and budgeting easier for you and your family. Keep in mind that regular, equal payments may not always allow for bigger, unplanned purchases.

2. Your Financial Habits

Of course, you can always manage or invest the funds you receive from a buyout as you see fit. If you can trust yourself to properly handle the funds, you can capitalize on the lump sum and fund your retirement on your own. This gives you greater control of your assets, so you don’t have to rely on the health or investment decisions of your plan sponsor.

However, if you mismanage the funds, you may squander the lifeblood of your retirement.

3. Plan Sponsor Health

The biggest question mark regarding the stability of lifetime pension payments is the health of the company or entity sponsoring your plan. If your former employer goes out of business with an underfunded pension plan, this poses a serious risk to your retirement.

If the sponsor of your pension plan does go out of business, the pension benefits may well be backed by the Pension Benefit Guaranty Corporation (PBGC), which guarantees your monthly benefit up to a limited maximum amount; roughly $5,600 for workers over the age of 65.

If you do not feel confident in the longevity of your former employer, and if the amount guaranteed by the PBGC significantly undercuts your actual balance, talk with your financial advisor about the merits of accepting the lump sum.

4. Legacy and Estate Planning

You cannot bequeath pension payments to your children. If you decide to receive a pension buyout instead, you gain complete control of the funds you’d receive. You have the opportunity to invest the funds for future generations or leave a specified amount to your heirs. If you don’t take a lump sum, you’ll have to find another way to leave money to your children or inheritors.

5. Your Health and Life Expectancy

The average American is living longer, with less dependency on socioeconomic factors. Despite the good news, higher longevity requires savings to stretch further, making retirement planning even more important.

If you are in good health, receiving lifetime pension benefits can offer an additional layer of income protection and take the pressure off of other income sources. As mentioned earlier, a one-time lump sum payout will likely be lower than the sum of your monthly benefits. It’s important to discuss your situation with a financial advisor who understands how a pension and wealth management work to make sure this sum lasts as long as possible, which may not be easy.

If you are in poor health or have an otherwise lower expected life expectancy, taking a lump sum payout gives you full control of your pension assets and enables you to organize all of your financial affairs as you see fit, without having to wait.

Weigh Your Pension Options With Your Financial Advisor

Deciding what to do with your pension is one of the biggest decisions you’ll make in your financial life. With several different factors to consider, working with a well-credentialed and experienced financial advisor can make this important life decision easier.

Not only can a financial advisor help weigh the pros and cons of each choice, but an advisor who understands a pension and wealth management can help create financial plans for each scenario. Work with an advisor who has the tools to run the numbers and make future financial projections with your actual account balances, so you can see how different scenarios will play out over time.

The Coronavirus pandemic has added another layer of difficulty to your pension dilemma. Working with a financial advisor can help increase the likelihood that you’ll make an educated financial decision and not an emotional one.

If you have concerns about your retirement, contact the financial advisors at Linscomb & Williams. This is not our "first rodeo." We have helped families with their financial planning needs for nearly 50 years and have experienced many different market environments. Contact us to see how we can help.


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Jessica Banitt, CPA, CFP®

Jessica Banitt, CPA, CFP®

Jessica Banitt is a Director and Wealth Advisor at Linscomb & Williams.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.