Lump Sum Buyout: A Case Study

 Tim Wyman & Melissa Joy from the Center for Financial Planning were recently featured in Dow Jones NewsWires on this subject.

In an article titled Pensioners Decline Lump-Sum Buyout by Niki Reading, Tim and Melissa collectively walk through an individual client’s decision process as they choose between taking a lump sum payment offer or continuing their annuity payments.  As the excerpt reveals, it is not always a number game.  Real life issues sometimes demand real life solutions.

The client is 70 years old and his wife is in her late 60s. In addition to the pension, they have about $1 million socked away, both receive Social Security and are also employed part-time. They use an annuity and Social Security to cover monthly living expenses.

Tim Wyman, CFP® ran the numbers and determined that the buyout looked appealing: The breakeven point was at about 12 years, he says, and Mr. Wyman and his team navigated the tricky life-expectancy conversation to determine that the clients, too, felt it made good sense.

While many long-time company employees feel a sense of loyalty to their employer--and believe that nothing will interrupt their monthly pension checks--there are others who are more inclined to take the money and run. In this case, the clients were happy to cash out.

But despite the initial allure of the lump-sum payout, Mr. Wyman and Ms. Melissa Joy, CFP® had one big concern about the clients' plan. Because the firm had managed the couple's money for years, they knew that the couple had for many years offered financial support to their two adult children.

"If you have $500,000 sitting in an account, when you give kids $20,000 it doesn't seem like it'll have a huge effect," Mr. Wyman says, but over time the tab had added up for the couple. And, with a little help from Tim and Melissa, the clients recognized that a $250,000 buyout check might lead them down the same path.

The experience reinforced to Mr. Wyman that smart financial decisions don't always revolve around whether the numbers add up. Indeed, in this case the key was looking beyond the dollars and cents to see the solution was right for the clients. The answer turned out to be no.

As the Ford pension buy-out season continues, many important decisions remain for Ford retirees. Please feel free to email Melissa or Tim with additional questions or comments.

Melissa.Joy@CenterFinPlan.com   Timothy.Wyman@CenterFinPlan.com

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This case study is for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

Want Another Reason to Consider Keeping Your GM/Ford Pension?

 Thousands of GM and Ford retirees across the nation are struggling with one of the most important decisions of their financial lives – whether to keep their current pensions or take a lump sum offer.  We support the case for each of these individuals working with their financial advisors to carefully analyze their particular situation.  But, before a final decision is made, recent statistics may give reason to pause and consider one more important factor in the puzzle. 

According to Dr. Michael Finke, professor at Texas Tech University, beginning between the ages of 55 – 59 (and certainly after age 60) we begin to lose our cognitive ability at the rate of about 2% per year.  Professor David Laibson, professor of economics at Harvard University, references research showing that between the ages of 65 and 69, 1.7% Americans are affected by dementia, and this number doubles every 5 years.  Even though financial capacity decreases, Dr.Finke indicates that confidence in financial decisions does not decrease.   So, our decisions aren’t as good as we think they are?

What does this have to do with the GM and Ford pension decision?  The potential for diminished financial capacity, combined with continued confidence in financial decision-making ability, may leave many Americans susceptible to poor future financial decision making and/or financial fraud.  By adding an annuity (a.k.a. the pension) – a monthly income stream that is locked into place – older adults may be hedging against these future dangers to their financial lives.   

If you or someone you know is still facing the GM or Ford pension decision and would benefit from an individual analysis of their situation, contact us for assistance.  And dig a little deeper into making this important decision by referencing additional blogs on this topic.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Consumer Alert: Have GM and Ford provided one of the greatest Money Grabs for the Financial Services Industry?

 

The automobile industry has played an important role in many Michiganders’ lives. I recall my own great-grandfather Mel working for Ford Motor in Dearborn. Mel was able to provide my great-grandmother and their children (my grandmother) a comfortable middle-class lifestyle thanks to his work there. Today, hundreds of thousands of people—both current employees and retirees--continue to depend upon automobile companies to help care for their families. 

Ford and GM have both recently announced changes to their pension benefits affecting an estimated 130,000 retirees. More of the details are laid out in my two recent blogs (May 4^th blog titled “Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?” and June 13 blog titled “GM Pensions to Follow Ford...With a Twist”), but the essence of the change comes down to choosing between (1) continuing to receive a monthly pension check that will be payable for the rest of your life, and (2) electing to forgo monthly payments and taking a one-time lump sum. 

Consumer Alert: Let’s face it – the financial services industry doesn’t have the greatest track record. Several firms in the financial services industry are already geared up to get their share of the lump sum payments via “free” seminars and “free” consultations. I am sure many of you were given the same sage advice my great-grandfather shared with me one time: there’s no such thing as a free lunch. 

Those in the financial planning industry get compensated in a variety of ways: fees, commissions, or a combination of both. Professionals that provide value deserve to be compensated. However, some advisors in the financial services industry do not get compensated for advising you to continue to take the monthly pension. And yet, this might be the most prudent decision for anyone with a normal life expectancy. 

Financial advisors/consultants/salespeople/insurance agents/stock brokers are often biased for you to elect the lump sum option. A professional financial advisor will start with a clean slate – learn about your unique situation and objectives – and then provide tailored recommendations based on the tradeoffs between the options. Any advisor advocating only one option should be avoided. 

What to do? The tricky situation with the GM and Ford offers is that general rules and rules of thumb just don’t work. You must take a lot of factors into consideration. So, run the numbers (you are encouraged to consult with a financial planner and/or tax advisor) and then weigh the risks before deciding. We have been working with several clients over the last few weeks. In some cases the lump sum offer made the most sense, but in others, we advised sticking to the pension option. Each situation is unique, and we have come to different conclusions based upon their individual circumstances, so make sure you are getting the best advice possible and not just a “free lunch” offer. 

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.