Pension Anxieties?

The markets continue to see-saw based largely on trade-war developments and the tweet du jour.  It’s hard to see stocks breaking out of the current trading range without some kind of definitive resolution to the spat with China.  Additional interest-rate cuts could help in the short run, but more and more folks are coming to the conclusion that monetary stimulus has reached the point of diminishing returns.  The cost of capital is simply not what’s inhibiting corporate investment and global manufacturing activity.  And finally, there is virtual unanimity with regard to the view that impeachment proceedings will not meaningfully affect the markets.  When almost everybody agrees on something . . .
With little economic data before Friday’s job’s report, we thought we’d depart from the normal economic commentary and discuss a financial planning topic – pensions.
Planning Notes
In recent months, we’ve received a number of client questions regarding pension plans.  As we’ve noted in prior Market Commentaries, many employers that still offer defined benefit pension plans have struggled with underfunding issues related to poor investment returns, increased longevity among retirees, and low interest rates.  In response, some of these employers are offering a lump-sum payout option to employees nearing retirement.  Clients are calling us to determine whether regular pension payments or the lump-sum option would be most beneficial to their retirement goals.
Each situation is unique and should be evaluated in context of other factors, such as:
  • Overall liquid assets
  • Risk tolerance
  • Anticipated expenses in retirement
  • Income sources such as Social Security, rental income, and military pension, etc.
  • Client’s health

The financial health of the employer and the pension plan should also be taken into account. Here are a few questions to consider:


  • Is the pension offering cost of living adjustments (COLA) to offset inflation and its effect on the future purchasing power of your money?
  • Does the pension offer a survivor benefit?  What percentage of the benefit will go to the survivor?  What is the cost of this benefit?
  • What is the ratio of your annual benefit to the lump sum payout?
  • Could you build your wealth faster with a lump sum payout if you invested in a moderate-risk portfolio with an expected annual return of 6% over the long term?*

Please reference the table below:

*All assumptions and calculations are based on hypothetical returns and do not guarantee future returns.
**Annual pension amount of $24,000 equals 6% of the $400,000 lump sum payout.


If you are currently receiving a pension, or will receive one upon retirement, please schedule some time to speak with us. We will evaluate your situation and help you make the best financial decision.