How To Tell If A Pension Buyout Is Right For You


Pensions encompass a large portion of current retiree’s financial plans. Though once a popular vehicle for attracting and retaining employees, defined benefit plans have been on the decline for many years. 

With pension plans running up a big deficit on many companies’ books, some have started offering employees pension buyout options. With a pension buyout, the employee receives the full balance of their pension as it currently stands and the company is released from their lifetime annuity obligation once the employee retires. 

A pension buyout will make more sense for some people than others. In order to start thinking through which option might be right for you, it is important to understand the specific buyout terms as well as your own financial horizon. 

Let’s take a closer look at some factors that can help you determine if a pension buyout makes sense for you. 

The financial stability of your pension plan

When you are offered a pension buyout, it is important to know that you don’t have to accept it. You may still be able to defer your payments to annuity-based compensation in retirement. Annuity payments are designed to be secure, stable sources of income in retirement, but that security depends on the health of the company and pension provider. 

If a company goes bankrupt, it could be released from its pension obligations, leaving uncertainty for your monthly funds. While most pension plans are insured by the Pension Benefit Guaranty Corp. (PBGC), not every plan has this safety net. 

Even if your specific plan is insured by the PBGC, you may not be eligible to receive the full balance of your monthly payment. For specifics on coverage limits check out this chart on the PBGC website. 

If you and your financial professional are sure about the financial security of the company, and therefore your pension, consider keeping your pension within the annuity structure. 

Your risk tolerance and investment goals

As with any financial decision, your goals should be at the forefront of the process. Risk tolerance plays an important role in a buyout choice. When you accept a lump-sum, you will need a strong investment strategy behind it in order to build up your nest egg. 

A buyout can provide you the freedom and flexibility to invest your money in a way that makes sense for you and your goals, while also giving you the opportunity to make higher future returns than your pension. 

But if you are a more conservative investor, a lump-sum might not make as much sense for you. When faced with a pension buyout, take some time to look at your current investment strategy. 

  • How is your strategy working now? Are you on track to reach your goals?
  • How would a lump sum enhance or detract from your goals?
  • How comfortable are you investing the full balance of your pension?
  • What is your investing timeline and retirement horizon?

You and your financial planner will be able to take a look at your investments and devise a plan that makes sense for you. 

Your life expectancy and health

Another crucial factor when looking at a pension buyout is understanding your own life expectancy. If you are extremely healthy and your family history suggests a high chance for living longer than the average person, sticking with the annuity payments may make the most sense. 

Employers offer buyouts based on a set of actuarial tables of average life expectancies, not individual ones. This makes understanding your own so important. When buyouts are calculated, it nearly always favors the company, meaning the lump-sum would ultimately be less than if you receive monthly payments for life. 

But if you are in poorer health or don’t have a family history of longevity, taking the lump-sum payout could be a viable option.

General money management

A pension buyout, like any other lump-sum payment, requires you to look introspectively at your own financial habits. 

  • Are you a spender or a saver?
  • How likely are you to stick with your financial plan?
  • Do you track your expenses?
  • Are you financially disciplined?

Someone who partakes in recreational spending or who isn’t as disciplined with their finances would benefit from consistent monthly annuity payments in retirement as opposed to a larger up-front payment. 

Yet another person may have the tools, resources, timeline, and other factors that lead them to be ready for a lump-sum and investing it in a way that enhances their plan. 

Talk with an advisor

Your pension impacts so many aspects of your retirement plan. Before accepting or rejecting a pension buyout, take the plan to your financial advisor. Together, you will be able to analyze the pros and cons of each decision and come up with a plan that makes the most sense for your financial future. 

Our advisors at Goepper Burkhardt love helping people create strong, secure retirement plans. It is important to us that you have all of the information you need to make the best decision for you and your family. 

A pension buyout can play a crucial role in your retirement and investment strategy. If you are still trying to decide which option makes the most sense for you, give us a call. We would love to help you. 


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