In 2012, the Ford Motor Company offered a pension buyout to about 90,000 former salaried workers. Ford offered a pot of money right away instead of a monthly payment during retirement. Other companies are making similar offers, usually to former workers who haven't retired yet. Comparing a buyout package and a retirement package is not a simple task because it involves many unknowns, such as how long you'll live, how much money you'll need when you retire, and what your health care expenses will be when you get older.
When you retire and your company has a pension plan, your retirement package normally consists of a monthly benefit in the form of an annuity. Whether you live for two years or for 20 years, you will receive the same amount of money every month until you die. If you're married, you must choose whether you want your spouse to receive 50 percent or 100 percent of your benefit if you die first. You can elect not to provide any income from your retirement to your spouse, but your spouse must sign a waiver that authorizes you to do that.
If your current or former employer is trying to reduce its future pension liabilities and retirement plan administration expenses, you might receive an offer to buy out your pension. Rather than receiving a fixed payment every month until you die, you receive a fixed amount of money as a single payment. It's up to you to invest that money and withdraw it over time so that you don't spend it all before you die. If there's money left when you die, that money goes to your heirs.
One way to compare your buyout offer and retirement package is to shop for an annuity. Contact an insurance company or use an online service to compare prices. Find out the monthly amount of an annuity you could purchase with the proceeds from the buyout offer. Compare the monthly annuity payment and your monthly retirement package benefit amounts to determine which one is higher. CBS MoneyWatch predicts that your retirement package will likely exceed what you can purchase through an annuity.
Health Care Benefits
If you're close to retirement and your company adds health care benefits to make a buyout more attractive, those benefits could add from $10,000 to $700,000 to the value of a buyout package, according to projections from the Employee Benefit Research Institute. Fidelity Investments estimates that a couple without employer-provided health insurance will spend about $220,000 in out-of-pocket expenses on regular health care visits alone. The estimate does not include long-term care expenses, such as for a nursing home or assisted living.
- CBS MoneyWatch: Pension Buyouts -- Who Wins and Who Loses?
- Kiplinger: When to Accept a Buyout
- CBS MoneyWatch: Should You Accept a Pension Buyout? A Closer Look
- Employee Benefits Rsearch Institute: Retiree Health Benefits -- Savings Needed to Fund Health Care in Retirement
- Daily Finance: Should You Accept a Pension Buyout Offer?
- The Wall Street Journal: Making the Case to Buy an Annuity
- Fidelity Investments: Fidelity Estimates Couples Retiring in 2013 Will Need $220,000 to Pay Medical Expenses Throughout Retirement
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