July 16, 2012

New PRC fact sheet for GM retirees offered lump sums

If you are a salaried General Motors retiree receiving a pension, you may have an important choice to make by July 20. GM has asked many of its salaried retirees to choose between a one-time cash payout and an annuity. It is important that you think very carefully before making this decision – it may be the most important financial decision you make for the rest of your life. Once you give up the lifetime monthly payments provided by an annuity, you can’t get them back. 

Studies show that retirees with lifetime payments are less likely to slip into poverty. Why? With the stable income provided by an annuity, you will be able to count on your monthly pension payment, no matter how long you live and regardless of what happens on Wall Street. That goes a long way toward ensuring your retirement security.

But with a one-time payment — a lump sum — you become responsible for replacing the security your pension used to provide with the money the company pays you, a daunting prospect for many. The offer you get may seem like a lot of money, but it will have to last both the rest of your life and the rest of your spouse’s life. You may think, “I can invest it and make even more,” but bad investments or a market crash could wipe out a lot of your funds. Or, since most of us hope for a long life, you could get that long life — and outlive your money.

Experts warn to be very careful before agreeing to accept a lump sum. However, there are circumstances in which they recommend taking a lump sum. For example, if both you and your spouse have terminal conditions and expect to die within a year or two, the one-time payment may be worth more to you than a lifetime guarantee.  Or if you are wealthy enough that you don’t need your monthly pension, you may want the lump sum to leave to your heirs. 

But, for most people, the safer choice is to stay with an annuity providing payments that protects you for life.  

The Pension Rights Center has prepared a fact sheet, Should You Take Your Pension as a Lump Sum?, to help guide GM retirees through making this important decision.  

The fact sheet highlights the risks of taking a lump sum.

• You Can Lose Your Money. If the market falls, your retirement income may fall, too. You alone are responsible for generating the returns you need for the income you want.
• You Can Outlive Your Money.  With an annuity, you get a certain amount of money periodically, no matter how long you live. With a lump sum, you have to guess how long you’ll live to decide how much you can spend each year. If you live longer than expected, you’re in trouble.
• You’re On Your Own.  While you were receiving your pension from the GM plan, your pension was managed by professionals who had to adhere to legal requirements. The insurance company GM has chosen to pay your benefits, Prudential, is also managed by professionals who must adhere to legal requirements. However, once you take a lump sum, you’re on your own. There is no safety net.   

Should You Take Your Pension as a Lump Sum? includes questions individuals should ask themselves before making their decisions, and a helpful chart highlighting the differences between lump sums and lifetime monthly annuity payments.

Founded in 1976, the Pension Rights Center is a Washington, DC-based nonprofit consumer organization committed to protecting and promoting the retirement security of American workers, retirees, and their families. Learn more at www.pensionrights.org.