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Should You Accept A Lump-Sum Buyout Offer? Thumbnail

Should You Accept A Lump-Sum Buyout Offer?

When planning for your retirement, there are many options for flows of funds during that time. One option is a lump sum buyout, but what does this entail?

It's important to take a step back and see how accepting a lump sum buyout offer could affect other aspects of your retirement funding.


Should You Accept a Lump Sum Buyout Offer?

With economic uncertainty increasing, more companies with defined benefit (DB) pension plans will likely attempt to improve their bottom line by offering lump sum buyouts. A lump sum buyout is a limited opportunity for DB plan participants to elect a one-time cash payment in exchange for giving up future periodic payments. Some buyouts are offered to participants who are near retirement age, while others target those already receiving benefits. Deciding whether to accept a lump sum buyout is an important choice that you shouldn’t make without consulting with a knowledgeable financial advisor. Here are several factors you and your advisor should be looking at:

What is the effect of interest rates?

The lump sum amount is calculated by taking into account several factors, including an assumption about interest rates. The lower the interest rate assumption, the higher the lump sum. With interest rates rising fast, this may be a good time to seriously consider locking in a lump sum, instead of waiting for a later buyout window to open when rates may be even higher.

How is your health?

The amount of the lump sum is also based on average life expectancies. If you expect to live longer than an average person of your age, you may want to consider passing up the lump sum. However, if you are facing medical issues, taking the buyout offer may be the way to go.

How financially secure is your employer and your plan?

If your employer goes out of business with a pension plan that doesn’t have enough funds to pay benefits, your existing or future payments could be reduced. That would be a factor favoring a buyout. The Pension Benefit Guaranty Corporation (PBGC) does insure pension benefits up to a certain amount. However, even though the PBGC’s financial picture has improved somewhat, it might be risky to count on that lifeline.

Will your spouse agree?

If you are married, your spouse must consent before you can receive a lump sum.

How tempting will a lump sum be?

Be honest with yourself. You may be the type of person who wouldn’t be able to resist spending a large check instead of putting it away for retirement. If you are, taking a lump sum now may jeopardize your financial well-being in later years.

Know the tax rules:

DB monthly payments are typically fully taxable in the year received, and you can’t roll them over. But a lump sum payment is eligible for rollover to an IRA. Once rolled over, your funds become subject to required minimum distribution (RMD) rules. But aside from that, you have lots of flexibility with IRA withdrawals.

These are some of the important issues that should be part of any consideration about accepting a lump sum buyout offer. Remember: Don’t make this crucial decision without getting help from an expert.

By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC

Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, 07/06/22, with permission. https://www.irahelp.com/slottreport/should-i-accept-lump-sum-buyout-offer, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Chris Cordoba, founder of California Retirement Advisors, is a member of Ed Slott's Master Elite IRA Advisor Group. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.