Ask Terry Questions Pension lump sum buyout

Pension lump sum buyout

By Terry Savage on August 11, 2015 | Financial Planning / Retirement

Hello Terry,
Former employee, ATT/Lucent/Alcatel-Lucent is offering a lump sum buyout of our pensions. I have many questions. It is a sizable amount of money. I am 64 yrs. old, single, working fulltime, and in great health (knock on wood). I need to continue to withdraw money from my pension to live. The lump sum amount, if not invested, will hold me for 13 yrs. at the current rate of yearly allocations given by the employer. What questions should I be asking? If I do decide to take it, what are my investment options to continue to withdraw on a monthly or yearly basis? Currently IL does not charge on pension income? If I roll it over, say into an IRA, then the income becomes taxable. Your guidance is very much appreciated. I have to decide by Sept. 11, 2015. Thank y

Terry Says:  Well, first of all, you have one fact wrong.  Illinois DOES NOT currently tax IRA withdrawals.  (What you might be thinking is that an IRA is less secure from creditors than a pension payout, and that would be correct.)  So assuming that you are not going to be sued, this is strictly a financial planning question.

On the one hand, you could roll the lump sum into an IRA, with no tax consequences, and then manage the investments and a withdrawal plan (with a certain Minimum Required Distribution) every year.  If you roll to Fidelity, Vanguard, or T. Rowe Price they will handle both the investment and withdrawal planning for you.  You can have automatic monthly withdrawals, or take money out at any time.  But even if you follow the recommended plan, there will be no guarantees that the payouts will last your lifetime as would be the case with a pension.

Perhaps your real question is whether the buyout amount — if invested in a different immediate annuity (a check a month for life, fixed) is “enough” to get you a check equivalent to the promised lifetime pension check.  Figuring this out is very simple.  Just go to,  and insert your age, gender, state, and the lump sum amount you have to invest.  You will see offerings frm major insurance companies giving you a monthly payout.  If the lump sum is not anywhere near enough to generate the same monthly income as your pension, then if given the choice you will want to stick with the pension promise.  (And, you will understand why the company wants to end the pension promise because it was “too generous.”)

If you don’t have a choice, but must take the lump sum offered, then I suggest rolling it to an IRA as described above.  You can make some investments that are likely to generate growth and income to support your retirement needs.   BUT, if you want some certainty about income, then you might take a portion of the money and buy one of those “immediate annuities” inside your IRA.  That will get you a guaranteed stream of (fully taxable) income for as long as you live.  The only caveats with this purchase of an immediate annuity are that if you die in a year or two, the insurance company keeps the remaining balance in the annuity account, and the check is a fixed amount that will not go as far if we have an inflation problem.


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