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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
Which pension buyout option best fits your situation? Should You Consider a Pension Buyout Option? By Britt Erica Tunick If you are one of the few people lucky enough to have a pension, something to consider is, ultimately, how would you like that pension to be paid out to you whether you are eligible to begin collecting on your pension in the near future, or whether retirement is still many years away. Let’s face it, there is good reason that pension plans have rapidly become a relic of generations past and that’s the simple fact that many of the companies and institutions with existing pension plans are struggling, or outright unable, to meet their payout obligations. Given this reality, it is quite likely that you could be approached with an offer to buy out your pension obligation early, either replacing it with a one lump sum payout or with smaller monthly payouts that would begin several years before you reach retirement age. For companies with pension obligations, both of these options are attractive because they mean the need to pay you less in the end. Whether these options make sense for you depends entirely on your individual circumstances. Regardless of which scenario you are offered, it is important to keep in mind that any early pension payouts whether in a lump sum or on a monthly basis - would be subject to income tax unless they are directly rolled into an IRA and invested until you reach retirement age. Beyond that, it is important to determine whether you can ultimately earn as much as you would if you just waited until reaching retirement age to begin your benefit which isn’t necessarily a simple thing to determine, as it is partially a guessing game. Given that there is no way to determine how long you will live, the best anyone can do is to make an educated guess about their longevity, which can be done by looking at average life expectancy tables, such as the one available from the IRS, which take into account factors such as gender and overall health. Once you determine your likely lifespan, simply take the monthly payment amount you would receive if you were to wait until retirement age to collect on your pension and multiply it by the appropriate number of months to get an idea of the full amount you could expect. After this amount is determined, consider whether you can generate the same amount, or close to it, by investing a lump sum payment or early payments at a lower monthly rate. |
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