Sitting tight: Why electing a lump sum payout may not make sense

One of the most difficult analysis that a financial advisors can be asked to make is whether a client should take a lump sum or a monthly pension. Most pensions are covered by the Pension Benefit Guaranty Corp. (PBGC) which aims to ensure promised payments from an employer. The premiums for retirement plans to participate in the PBGC are going up dramatically by 2016. This cost seems to be motivating employers to offer lump sum buyouts in higher frequency as I've seen an increased amount come across my desk this year. While the numbers vary for each person and situation, here is the analysis I recently used for a client who was still working. The former employer offered three options: 1) take a lump sum payout 2) collect a reduced amount starting immediately 3) collect the scheduled amount age 62. For scenario #1 we compared what a respected insurance company would offer us for a lifetime annuity along with simply taking the money and withdrawing 4% per year. In scenario #2, since the client would not be living off the money currently, we assumed he would save the money until he attained age 65, and then start withdrawing 4% per year. Neither of these options produced more income than just waiting and taking a guaranteed withdrawal at age 62. He would not have to assume any investment risk. It would be hard to argue for anything but continuing with the pension. The only scenario that would change our thinking would be a health issue where the retiree was not expected to live to a normal age and then the lump sum would be the preferred option.