By Joe Vitale
Are you a previous employee of Hewlett-Packard/EDS and are now eligible for the pension buyout options the company is offering? Though this is an opportunity of a lifetime, the best option is different for each person. Your age, length of service with the company, and current financial situation are just some factors to consider when making an informed decision. Consider working with a financial advisor who has a fiduciary responsibility to act in your best interest. Read on for a high-level overview of what you should keep in mind.
Basics Of The HP Pension Buyout Offer
Hewlett-Packard’s decision to offer pension buyouts is not unique. Many employers are taking this step to reduce their future pension liabilities and cut costs, especially during the economic weakness caused by the pandemic. Even if you didn’t work for HP, if you or your spouse have a pension from a past employer, you may one day face this decision.
In a pension buyout offer, the company is usually offering you a lump sum equal to the present value of the payment you would have started collecting at 65. Or you can opt to receive regular payments in retirement. Learn the pros and cons of each.
Choosing A Pension Buyout
Taking a pension buyout can give you more options for how you use or invest your retirement benefits. One option is to roll the funds into an individual retirement account (IRA). If you’re comfortable making your own investment decisions, you can do that through an IRA. Also, holding the money in an IRA means you will have more options in both how you can withdraw the money in retirement or pass it to your heirs than is offered by a pension.
If you’d like to replicate the steady income you would receive from a pension, consider using the lump sum to purchase an annuity, in which an insurance company pays you a regular income in exchange for depositing a sum of money with them up front. Unlike pensions, many annuities provide payment options that rise over time to keep pace with inflation, which is an important consideration as you may spend 20 or more years in retirement.
One other reason to consider a lump sum: If you’re facing health issues or have another source of retirement income to rely on, taking a lump sum allows you to enjoy your pension funds today.
Consider not taking the lump sum if you’re uncomfortable managing your own money or are afraid you’ll spend the money on other needs or wants before retirement. Also, know that if you don’t roll the lump-sum payment into an IRA or other workplace retirement plan, those funds will be taxed as ordinary income, possibly driving your overall tax bill higher.
Opting For The Pension Payment
If instead you wish to continue with a monthly pension payment, you’ll be able to look forward to a steady source of income starting on your retirement date as long as you live. That regular pension payment, along with Social Security, can help ease your worries about running out of money in retirement, and free you from the need to handle your investments.
There are some potential downsides in opting for the payment to keep in mind. One is that the value of your pension benefit is typically frozen once you no longer work for the company. That, coupled with inflation, means your payment in retirement may not be enough to meet your needs. Also, consider the financial health of your employer. If the company runs into financial trouble in later years, it may jeopardize your pension payment.
Making Your Pension Decision
Choosing between a lump-sum buyout or regular pension payments is a huge decision that will affect your financial situation for decades to come. I strongly consider you to work with an experienced advisor who is also a fiduciary and will help you arrive at a decision that’s in your best interest. We at American Retirement Advisors, Inc. would love to partner with you on this decision as well as the rest of your financial journey. Call us at (855) 756-5700 or email joe@aradvisorsinc.com to set up a complimentary introductory appointment.
About Joe
Joe Vitale is president and independent advisor representative at American Retirement Advisors, Inc. With over 30 years of experience in the financial industry, Joe specializes in wealth preservation and distribution, helping his clients protect their hard-earned money from market downturns and the cost of long-term care. As a fiduciary, Joe cares deeply about putting his clients first and serving their best interests. Joe resides in Lapeer County, where he is involved with and supports numerous local and national charities. He enjoys spending time with his friends and family, including his 5 daughters and 3 grandchildren. In his spare time you can find him relaxing in the country with his family or trying to better his golf game, which needs some help! To learn more about Joe, connect with him on LinkedIn.