A defined benefit pension plan is terrible thing to waste, yet many people seem quite open to it.
I’ve been surprised over the years at how many people seem interested in the idea of commuting their DB pension, which means taking the money in a single lump sum to invest yourself. Here’s the latest example: “I am 63 and retiring within the next two years,” a reader recently said in a query sent my way. “I have a DB pension and will have the option of taking the pension or receiving a payout. … As I await my pension options, are there key things I should consider in the decision to take the pension or take the cash?”
For a personalized answer to this question, see a financial planner. I suggest a fee-for-service planner who would charge a flat or hourly fee to provide an answer the reflects your wants and needs. Meantime, let’s look at some of the factors that go into this decision. Someone who already has ample retirement savings may prefer the lump sum rather than the pension because there’s more flexibility in how to use the money. DB pensions are paid monthly for life – there’s no way to make a big withdrawal to fund a trip or put a new roof on your house.
Commuting the pension might also make sense if you were worried about the financial solidity of your employer. The risk is that your employer goes bankrupt at a point in time where the pension is underfunded and cannot meet its obligations in full.
The reason to keep the pension is that it represents worry-free cash for life. Having a DB pension frees you from following the ups and downs of the stock and bond markets. There’s no risk you’ll freak out after a stock market crash and sell at a low point, thereby locking in losses that could have a serious long-term impact on your retirement savings.
The reason to see a fee-for-service planner about this pension question is to avoid the conflicts of interest that can arise when you deal with an adviser who is paid via fees or commissions related to investments. Commuting a pension can put a big whack of money in an adviser’s hands – and yours. Make sure you get an unbiased analysis of whether such a move makes sense.
Rob Carrick