Broker Check

Lump Sum Pension Option

Take It or Leave It?


By: James C. Denton, CFP®, Managing Partner

Executive Summary

Q: My pension plan provides a substantial lump-sum settlement option in lieu of a life-time annuity.  Should I take the cash or the annuity?

A: There is no simple answer to this question, and this treatise is not intended to be and should not be taken as advice either in favor of or against either option.  This presentation, of which this first page is only a summary, is an effort to identify the issues which you should consider; your decision should be a result of a detailed analysis made with the assistance of a qualified, objective professional.

What is your goal?  Your pension may be your most valuable asset and maintaining some degree of control could be a worthy objective.  But what does that “control” entail?  (i.e., the ability to spend without limitation, or rather to create and preserve an estate asset?)  And what responsibilities and risks does it bring with it?  You must start by identifying – articulating - specific desired outcomes; what are you trying to achieve, and what, as a minimum, must you achieve?

Does your pension plan include health insurance benefits?  The first, and what could very well be the most important consideration in your decision process is the availability of health insurance, and how your decision may affect your eligibility for coverage.

Is that lump-sum option really “a lot of money”?  Is the cash a better deal than the lifetime pension option offered? For some folks it is a really good deal; for others, maybe not.

  • How much is the maximum monthly benefit payable for your life only (no survivor benefit). This amount is guaranteed regardless of how long you live.
  • What are the survivor benefit options? What will the survivor receive upon your death, and how much of your benefit will you have to give up to get it?
  • Will your benefit be increased periodically to accommodate the rising cost of living?

What are the hidden costs of the pension option or comparable benefits of the lump-sum election?

  • If you take the pension option, you do not own the capital
  • If you take the cash option, you can adjust your income providing flexibility to your needs instead of a fixed income that is not responsive to as your situation changes.
  • Survivor benefits may also be more flexible with a cash settlement you control

What Investment return is necessary to achieve your desired goals, and how are you going to get it?

  • Is your tolerance for risk adequate to the amount of risk you will need to accept?

Additional Risk Factors

  • Your income may fluctuate down or up.
  • You may not obtain your desired results
  • Living too long is a greater risk and brings much more serious consequences than dying too soon.
  • Your investment assets may be more accessible to legal liability than would your pension benefit


Q: My pension plan provides a substantial lump-sum settlement option in lieu of a life- time annuity. Should I take the cash or the annuity?

A: There is no simple answer to this question, and this treatise is not intended to be and should not be taken as advice either in favor of or against either option. On the contrary, my purpose is to identify the issues which you should consider in making your decision.  Your situation is unique, and your decision should be made based on your unique circumstances. My objective is to help you recognize and evaluate the specific issues in your own situation because your decision has life-long consequences not only for yourself, but for those for whom you are responsible, and about whom you care.  You should only make this decision with the assistance of a qualified, objective professional whose task it is to assist you with weighing the pros and cons of either alternative.  

What is your goal?   Your pension may be your most valuable asset.  Whether this is true or not, managing it properly is an important financial planning objective.  I believe it’s important to begin with a reasonable purpose, an understanding of the relevant issues, and realistic expectations for taking on the responsibility inherent in controlling your financial future. 

Your purpose, intent and overriding goal, if you take the cash option, should be to preserve, protect and defend your capital.  You are not looking for the ability to buy a boat, for example, or necessarily to live a “better” life in retirement, however you might define or flesh out that idea.  Your goal is to preserve, protect and defend your pension capital.  Ultimately, your own best interests will be served if your intent is to create an estate equal to or greater than the current cash value being offered to you in lieu of a lifetime pension income.

This specific idea is sufficiently critical to the decision that you should have a conversation specifically dedicated to this concept at the beginning of the process.  Developing it adequately in any meaningful way is beyond the scope of this presentation but is critical to a successful decision.  Call me for an appointment!

Taking control of your principal means taking responsibility for your own future.  It almost certainly will require you to make uncomfortable cash flow decisions from time to time.  While you may be able to access your capital at times, doing so should only be accompanied with the recognition that you may have to “pay yourself back” at some point with reduced income.  If you are not prepared to accept this reality, if you do not have the discipline or self-control to act within the bounds of this reality, then you should probably take the pension. 

If for whatever reason this is the only advice you are receiving on the issue, or if you are unable to understand and come to terms with the risk of being wrong one way or the other, then my recommendation would have to be to elect the lifetime pension. The potential consequences of that turning out to have been the wrong decision are, in my opinion, far less devastating than the risks inherent in taking the lump-sum settlement.

With that as a starting point, let's begin with what could turn out to be the most critical question:

Does your pension plan include health insurance benefits?

Some corporate and most public retirement plans include health insurance benefits for the retiree him/herself, and sometimes for family members as well. Often, taking a lump-sum payout option may reduce or eliminate this benefit. Before you make an irrevocable retirement election, you should know… 

  • Whether/what health insurance benefits are provided to pensioned retirees,
  • Whether those same benefits would be available if you elected the lump-sum option, and
  • What options may be available to you to replace this coverage and at what cost.

If your pension plan… 

  • Does not provide health insurance benefits, or
  • Does provide health insurance but does not distinguish between pensioned and cash-out beneficiaries, or
  • If you for whatever reason do not need health insurance (for example, you are covered by a spouse’s plan),

... then you can skip down to the next question, "Is that lump-sum really a lot of money?"

Otherwise, read on.

Health insurance as a retiree benefit may be, but probably is not an "entitlement".  That is to say, even though the retirement plan currently includes health insurance, there is no guarantee that they will continue to do so. This is true even if the current benefit is statutory (only in a government plan would this be the case).  Plan benefits can and do change, even in government pension plans. The law providing these benefits can be changed and it is becoming more common for lawmakers to amend benefits even for persons who are already retired.  In the private sector, amendments to existing retirement health benefits is becoming commonplace.

Part of the solution is the availability of Medicare [1]. Medicare, however, is limited in scope and may be inadequate as a stand-alone health insurance plan.  Under current law, Medicare is the default health insurance provider for anyone over 65; privately-purchased or pension fund-provided health benefits are usually supplements to Medicare as first payer.  Private Medicare-supplement [2] insurance programs are also widely available. These plans can be reasonably priced, depending on the level of benefits provided, but should be expected to become more expensive as you age, or as health costs continue to escalate.

Medicare benefits are statutory, but the law can and sometimes does change. There is no reason to believe that Medicare will not be available throughout your retirement. It is not unreasonable, however, to be concerned as to whether those benefits will be sustained at current levels. As the population ages, as the trend towards greater longevity continues, and as the baby-boomer generation becomes consumers of rather than contributors to the social security and Medicare programs, changes to these programs as they currently exist will become unavoidable, and those changes almost certainly will include increased taxes to the working population, reduced benefits to all, and likely increased cost sharing by at least some beneficiaries [3]. Benefits provided by your retirement plan could prove to be very important as a supplement to whatever coverage Medicare may provide.

If you are retiring before age 65, then the issue arises of what to do about health insurance coverage between when you retire and Medicare eligibility at age 65. In this case, the question of the availability of health insurance and the cost to replace it if you give it up are a critical issue in the comparisons to be made.

Is that lump-sum option really "a lot of money"?

OK, you're still reading so that means that either your plan doesn't provide health insurance or giving it up is not necessarily a deal breaker.

Your decision then comes down to whether taking the cash is a better deal than the lifetime pension option offered. Let's start by identifying the cases when you almost certainly should take the cash and run.

  • First case: You're single, you have no dependents who would qualify for a survivor's benefit under your plan, or your eligible dependents (usually only a spouse) has adequate income through other sources, and you have health issues which may impact your life expectancy.
  • Second case: There is no second case. If the “first case” criteria above do not apply to you, you should carefully consider all of the options, risks, and benefits of the lump sum versus guaranteed lifetime payout before deciding which makes the most sense for your (unique) situation.

 You see, the cash-out option seems enticing; it sounds like a lot of money. Furthermore, the fact that this option is available to you is public information. (Everyone in the "money management" business knows which pension plans offer the most lucrative cash-out options.) This fact alone will bring out a host of "financial planners" and "retirement planning advisors", offering “educational seminars” probably including a “free” meal.  These “advisors” and/or “planners” are intent upon encouraging you to take the cash and turn it over to them to manage for you. Some of them may be well qualified and well intentioned, but all too many are insurance, annuity or mutual fund salesmen (i.e., by definition, not financial planners) who may have limited qualifications and even less incentive to properly advise you concerning the long-term ramifications of the decision you face. 

Setting aside our inherent conflicts of interest, and not wanting to impugn the integrity of anyone especially someone I don't know, let me just say that you and you alone are ultimately responsible for the decision you make, and if you are not fully informed concerning, comfortable with, and willing to accept the ultimate consequences of your decision, then the pension is probably the better option for you.

Still with me? OK. then here are some of the things you will need to know to decide if the lump sum is really a fair price for your pension fund to buy back their obligations to you.

How much is the maximum monthly benefit payable for your life only (no survivor benefit). This amount is guaranteed if you live to be 130, and ends, in most cases, if you die 31 days or more after retirement.  You can shop this value to various private annuity providers to determine the "net present value" (NPV), or what it would cost you to purchase a private annuity for the same amount. The NPV represents the value of your gross entitlement, and it is the value upon which all survivor benefits are based; it should be compared to what the pension fund is offering you as a basic, albeit rudimentary means of evaluating the relative value and fairness of the cash option.

What are the survivor benefit options available with the pension plan[4]?  What will your spouse receive upon your death, and how much of your benefit will you have to give up to get it?  Typically the plan will offer multiple options with a 100% or lesser survivor option, and with the primary benefit being reduced proportionately to the survivor benefit elected.[5]

Is there a "pop-up" provision? If your spouse pre-deceases you, is your maximum monthly benefit restored (a rare provision in private plans, but appearing more often in public plans), or are you stuck with the reduced payout which you accepted for the survivor benefit in the first place (the more common case).  If there is no restoration of benefits, your spouse’s health and life expectancy become an important factor in your decision making process.

Is your benefit subject to inflation adjustments? Will your benefit be increased periodically to

accommodate the rising cost of bread, milk and taxes? At 4% inflation, your cost-of-living will double every 18 years. Put another way, the purchasing power of a fixed pension will be cut in half every 18 years. Considering the average retiree of our generation will probably spend at least 25 years in retirement, (more for early retirees) the future value of a pension not adjusted for inflation will be severely reduced.  The absence of inflation protection is an important argument in favor of taking the cash and then taking less income from your own capital account initially to preserve the availability of more income later when you almost certainly will need it.

The answer(s) to these questions will help you to decide if the cash option is really a lot of money. In other words, assuming you had control of the principal, could you generate for yourself, a better set of options for lifetime income security. Remember,

The pension promised is guaranteed for life. This is especially true for a government plan. There has never been, and I expect will never be a default in federal pension benefits; but neither does the Federal government offer a cash-out option (yet).  Some state plans are severely under-funded and there have been incidents of default by local governments. Government pension funds can and usually will resort to public funding resources (read taxes and/or bonding) to make good on their obligations.  Nevertheless, the future of many of these pensions is cloudy to say the least, and political factors should be given due consideration in your decision-making process.  

Private pensions lack the secondary funding available to taxing authorities and may or may not be funded and/or conservatively managed sufficiently that your guaranteed benefits are dependable. That said, there have probably been far more cases of individuals assuming responsibility for the management of their own funds, and then coming up short, than there have been of pension funds failing to make good on promised benefits. The Pension Benefit Guarantee Corporation (PBGC), a quasi-governmental agency also guarantees private pensions up to a certain level so that complete defaults are the exception rather than the norm.

What are the hidden costs of the lifetime pension option or comparable benefits of the lump-sum election?

All right, now we get to talk about all the things that have occurred to you; the reasons why you might want to take the cash option, regardless of the issues identified above.

That lump sum really is a lot money. If you were to take my earlier advice and shopped your pension benefit for a ''net present value" comparison what you probably would find is that the cost among reputable, sound insurance companies (only insurance companies can sell an annuity contract) is probably a little more, but pretty close to the lump-sum value being offered. They - insurance companies and pension funds - tend to use similar life expectancy tables and investment performance assumptions, so they should come up with similar cost benefit solutions. If they told you, and they probably won't, what investment yield or interest rate assumptions they are using, you would find their expected return is quite low, probably in the 3 to 4% range at the most, perhaps less[6].   

Why so low? Because of the long-term nature of the guarantees they are making, they have to invest conservatively (a substantial portion, perhaps the majority of their funds are invested in long term bonds with very low but guaranteed yields); because they have to continue to pay you even if you greatly outlive their life- expectancy projections; because they cannot guarantee higher investment returns; and because they want to make a profit.   Yes, even the government pension funds have a profit motive, if for no other reason, to compensate for the underfunding they are currently experiencing, and no expectation that legislators will find the political will or moral courage to do anything about it at any point in the future.

Ultimately what this means for our discussion is that obtaining investment results to pursue a higher rate of return and therefore better long-term income potential, is eminently doable. So long as you recognize and are willing to accept the risks that come with it, taking custody of and responsibility for the performance of your account can have very satisfying results[7].

You do not own the capital account that funds your pension. If you elect the pension option, once you receive your first check you have no entitlement/right to withdraw any cash from the account for any purpose, even if you were willing to reduce your monthly payment. Furthermore, regardless of when you die (how soon, or how late), there is no residual benefit for anyone other than your surviving spouse, and then only if you elected a survivor benefit for him/her.  If you take the cash option, you own and have control of the funds, for better or for worse.

You can adjust your monthly income consistent with your needs if you control the principal. You can increase your income when circumstances dictate or reduce it at times of lower needs.   You may be able to reduce taxes and/or to allow for the growth in capital necessary for greater income in the future. Many retirees, especially younger ones, find they have more energy than they originally expected, and decide to take on part time jobs, or even new careers. In such a situation, reducing or eliminating the income while not needed will reduce your income taxes while allowing the principal to grow for a larger future benefit. The key here is flexibility to your needs instead of being faced with a fixed income that is not responsive to your situation.

Survivor benefits, similarly, are much more flexible and "Pop-ups" are not an issue if you control the principal. In fact, depending on the cost of the survivor benefit in your pension plan, this may be more important than the large initial cash value as an argument in favor of taking the cash settlement. If you are concerned about assuring a benefit for your spouse upon your death, you might elect a life insurance-funded alternative (see footnote 4). If your long-term goal is to insure a relatively stable principal amount over an extended period, the issue of survivor benefits becomes less critical to the immediate discussion; in effect, it takes care of itself. The survivor's income upon your death, if the principal is managed properly, will be what the survivor needs, not what some pension plan dictates he or she will receive (and probably can exceed what she would have received). Once again, you have flexibility to your needs rather than a set-in-stone solution.

The pension promised is guaranteed for life. Wait, that was a reason to take the pension, not the cash, wasn't it? Well, actually it can also be a reason to take the cash. Other than inflation adjustments (which probably are not included as previously discussed, and in any event are subject to esoteric definitions and calculations of inflation which may not accurately reflect your own cost of living), your pension is fixed - cast in stone - for life, regardless of how your situation or cost of living may change.  You get exactly what you are guaranteed, regardless of whether your situation, needs, goals, expectations, or other considerations may indicate a higher or lower income at various times in your life.

And finally, the pension is only guaranteed for life. When you and your covered spouse have passed on, the pension ends. There is no residual value for you to pass on to your children, a favored charity or other beneficiaries you would prefer over the pension fund to have your money.  When you die, it's over regardless of how long you live. For better or for worse.

A lump sum, on the other hand, if properly managed [8]can yield a fairly significant inheritance or charitable bequest when ultimately you don't need it anymore for your own living expenses.

Investment Planning Considerations

What is your ultimate goal?   Both optimum, and minimally acceptable outcomes should be articulated up front. This becomes the starting point for your financial plan.

  • Remember, we addressed this as a starting point for the entire discussion. Here we flesh out what it means. Your goal, in my opinion, should be to leave a lump sum inheritance to your heirs equal in purchasing power to what you are starting with (see footnote 8);
  • Your minimally acceptable result should be not worse than to die broke at age 100. These are not necessarily proposed goals, although the minimally acceptable goal of income to age 100, in my opinion should be just that; anything less is not acceptable.

For someone in their 30’s with a young family, dying too soon is (or at least should be) the primary financial planning concern.  When you’re in your 60’s or later – for someone making the decision we are discussing here - living too long is a far greater risk than dying too soon.  For most of us, there is a significant chance that either your or your spouse will live to age 100 if not longer.   Certainly you should be prepared for that possibility.

Whatever your goals, your account should be actively, dynamically monitored and managed to make sure your account value at any time is somewhere between the established glide paths for those two results. In other words, you always know where you are with respect to achieving your minimally acceptable results, and you know if you are getting into trouble soon enough to take corrective action.

I have taken us farther into financial planning strategy than I wanted to go in this analysis, but it illustrates the types of considerations that should go into making the decision in the first place, and the concept is important in determining the answers to the next two or three questions, which also are critical to the basic decision:

What Investment return is necessary to achieve your desired goals? What is the minimum rate of return necessary to be able to plan for an income at least equal to the pension guarantee?  That number is going to be a bit greater than that derived from the “present-value” calculation discussed earlier[9].

How are you going to get it? What kinds of investments are you going to have to use in order to be able to reasonably expect to achieve the returns necessary, whether in interest, dividends, capital gains, or other forms of return on investment, to generate the income you need now and the growth to account for future needs?

Risk tolerance for yourself and your spouse: Do you have the stomach for the variability of returns to be expected from the kinds of investments in which you will need to invest? Investments with higher expected returns, as discussed previously, typically have a greater fluctuation in performance (volatility) over shorter time frames, and this can be disconcerting even to the most disciplined of investors. It can cause those less tolerant of volatility to behave in ways that are counter-productive to their stated goals, especially if they perceive they are unable to absorb even short-term loss of capital.

Lump-sum withdrawals: This is where you are going to get into trouble. The cash itself is enticing to you now or you would not be reading to this point. It seems like a lot of money and it is. But for your plan to be successful, it will need to grow for at least the first 20 or so years of your plan. As it does so, it will become more and more tempting to raid it for other uses. New cars, boats and such. A vacation home. Fancy vacations, "while you are still young enough to enjoy them".  I can’t tell you how many times I have heard this used as an excuse to raid retirement savings by clients who are probably going to outlive what they have.  The potential problem here is that it is the capital itself that not only provides your current income but will also create the (greater) income you will need in the future. If you consume the capital, you: put the future cash flow in jeopardy.

Let’s think like a farmer for a minute. You have a yard full of chickens and a few head of cattle. So long as the bull and the rooster do their jobs, you have all the eggs, milk and meat you need for normal consumption. But if you develop a taste for fried chicken for supper, or if you decide to invite the family or the neighbors over for a barbecue, you need to make sure the critters that survive will be enough to continue to reproduce themselves for your future needs. If you reduce your herd and then the bull gets sick, your cows may also catch whatever he has before they are able to reproduce to meet the milk budget. Or if you fry up or grill too many chickens, the ones left may not even be able to provide enough eggs for you to eat properly, much less to be able to leave a few to hatch new chicklets for future eggs.

Income producing capital is exactly like that. Killing a cow for meat for a barbecue is essentially a capital withdrawal decision.  The account (or the herd or flock) looks large and adequate for the future. You feel like you can afford to spend a little on something special.  (The neighbors have had parties and you were invited, you need to reciprocate; or they haven’t invited you and you need to prime that pump.)  You feel a sense of entitlement, and it is indeed your money. You are entitled. But about the time you do, if the market moves against you at the same time, the combined effect can be devastating, and it can take a long time to catch up. And it can be downright painful in the meantime; fewer eggs, less milk, no beef. 

If your goal is to conserve the principal and leave it to future generations, then go for it. If your plan is to get control of the principal so you can spend it as you see fit, the pension might be the better option if your income needs are not met from other sources.

Additional Considerations:

Life expectancy:  How long do you (reasonably) expect to live? This is not the ridiculous question it may seem at first blush. Do you have health issues which may affect your longevity? How long did your parents live? Siblings, uncles and aunts? Family history for yourself and your spouse should be examined. A short life expectancy would argue in favor of taking the cash; a longer life, depending on other income and capital sources available, might benefit from the long-term guarantees of a pension although the presence or lack of cost-of-living adjustments might suggest the opposite.

What does your spouse think? Don't make the mistake of making a unilateral decision, regardless of how disengaged, detached and/or trusting he or she may be. Your spouse should be as involved in this process as you are because they have the same issues at risk. As a matter of fact, the less inclined they are to participate, the more important their ultimate needs and concerns should be because they will have to live with the consequences even as you do but may be more dependent on good outside advice than you are - a dangerous combination.

Additional Risk Factors:

Your income may fluctuate down or up. Your money manager may have to tell you from time to time that you need to temporarily reduce your withdrawals. Investment returns, while remarkably stable over extended time periods, tend to fluctuate significantly over shorter periods and these violent short-term fluctuations can have completely out-sized impacts especially when you are systematically withdrawing funds.  Investment managers like myself like to think and talk about long-term investment performance but the fact is we live in a short-term world.

One factor not widely understood even among financial professionals; two investment portfolios achieving identical average rates of return over a 25-year time frame (a minimum retirement plan) may see significantly different nominal values during or at the end of that time frame, depending on the timing and variance in the yearly rates of return and the amount(s) and timing of withdrawals, whether systematic income payments or larger sums for specific purposes. Your planner should be able to illustrate to you, how this occurs and the practical effects of it upon your portfolio[10], and strategies aimed at reducing or benefiting from volatility.

You may not obtain your desired results. All of the foregoing combined illustrate all the reasons why, in spite of your best efforts, or those of others on your behalf, and even if you do everything right, it's always possible that circumstances will conspire in such a way that your desired results are not obtained; your account may lose money over time. And it may or it may not be your fault.  These factors working together could have a negative impact on your account enough that you may not be able to sustain withdrawals at the same rate as would have been received from your pension. In a worst-case scenario, you could outlive your resources, leaving yourself without an investment income.

Your investment assets may be more accessible to legal liability than would your pension benefit, either in the case of a tort liability lawsuit, or in the event of divorce.  This is a matter of state law, and a question you should pose to an attorney in the state in which you now live as well as that of any state to which you may expect to move. Remember, the more assets you have, the more attractive you are as a litigation target. Pension benefits are protected from claims of creditors or lawsuits in ways that personal or IRA assets may not be.  This would argue in favor of sticking to the pension, or of carrying significant personal liability insurance protection. How much coverage? Enough to make it worth the insurance company's while to defend you to the end.

Incidentally there is no insurance company out there to my knowledge which will insure you against divorce settlement risks. If the potential for divorce exists, you (both retiree and spouse) should include that eventuality and its practical effects into consideration in determining which retirement option to select.   

Selecting/Evaluating a planner or advisor

This is perhaps the most critical part of this entire process. Even if you feel somewhat comfortable having managed your own finances in the past, you still need professional help with this decision. The best doctor does not diagnose or treat himself. The most qualified lawyer would scarcely decide to represent himself as a defendant in a lawsuit if his life savings were on the line. You don't want to trust your entire future and that of your family to your own lack of knowledge or appreciation of the complexities of the various investment, tax, insurance and other planning issues involved. And the trickiest part is you don't know what you don't know. You need qualified professional help.

Experience, education, and training. This is not a job for a neophyte, someone looking for on-the-job training at your expense.

  • Ask for and follow up with references and look specifically for people with situations and needs similar to your own. Do what you can to ensure the credibility of the references themselves.
  • How long has he/she been practicing? At least five years’ experience as a financial planner is minimal for this level of complexity and must be accompanied by advanced training and professional preparation. Five years selling life insurance, annuities, mutual funds, does not qualify anyone for financial planning, especially this level of financial planning.
  • What specific education and training does he have which serve to qualify him for the task? He should have a college degree, and/or college-level education specific to financial planning. The CFP® mark is the premier designation in the financial planning industry; an attorney or CPA specializing in financial planning should also be adequately prepared, but simply because someone holds one or more of these designations should not be taken as proof-positive of their skills or qualifications. Specific topical experience is still essential.
  • Is he an independent planner with an "open product shelf'? e., if he is involved in product sales, is he free to offer a variety of products from various sponsors, or is he linked to a specific company and largely limited to that company's products? For this type of planning, you probably should be a bit skeptical of anyone who is an employee of an insurance company or a brokerage firm subsidiary of an insurance company.  To a hammer, everything looks like a nail.  To an insurance agent, there is no financial planning problem that can’t be solved by an insurance product from his company.  Beware of this mindset.
  • Number of clients and assets under management (AUM) are important indicators of experience. While some well-qualified practitioners intentionally restrict their practice to a small number of high-net-worth clients (and his AUM will reflect if this a successful strategy), you probably shouldn’t be trusting anyone with less than $30 to $40mm under management for this level of advice and management.  Remember, though, that Bernie Madoff had >$50 billion under management by his own measure.  Pay attention!
  • Does he have time for you? How important is your business to him? I don't think you want to be his biggest account, but you also don't want to be insignificant, to the point of being pushed to the side when larger, more important customers (to him) take up his time so that he doesn't keep up with what’s going on in your account.

Other questions to ask him:

How does he get paid? Nobody works for free. You shouldn't expect it, and if the prospective advisor tap dances on this or tries to convey the idea that somehow, someone else is footing the bill, you should be more than skeptical.  You should be gone.

The answers to this question are many and varied [11] and there is no universal right or wrong answer. Most experienced and competent advisors will offer you a choice between various compensation solutions; you should understand and be comfortable with the solution chosen.

How does he plan to invest your money to seek to achieve your expected goals? How does he evaluate/ measure your risk tolerance, and how does he select appropriate/prudent investments for you considering your goals and risk tolerance? How does he go about the task of monitoring performance and your changing situation to make course corrections when necessary?  You should understand and recognize the validity of his methodology.

Discuss this paper with him. Does he understand and can he explain the concepts discussed here? He probably won't agree with every conclusion, and it's not necessary that he does, but he should understand those concepts, and be able to articulate his own views in ways that make sense to you.

And once again, deal your spouse in on the interview and selection process. He/she may have to get along with this person long after you are no longer around.  As a matter of fact, this is often the most important benefit a financial advisor brings to the table … he or she should be a trusted third party that knows your situation in the event that (make that, when) you are no longer around to explain things to or make decisions for your loved ones.  Make sure she is comfortable with the advisor.

In conclusion

We have discussed a wide range of issues, some easily grasped and others perhaps somewhat complex or esoteric. Much of what we have looked at may not be pertinent to your situation but those parts that are should be seen as critical. The decision you face is potentially life changing, and there are strong incentives, for you, and for your advisors, to get it wrong.  It really is a lot of money! As pointed out earlier, you and you alone are responsible for the outcomes and consequences, and you and people you love are the ones who will have to live with the results. And there's only one chance to get it right.

On the other hand, and this is also a very important point, your take-away should not be that this is an either/or proposition. There are many hybrid solutions.  For example, you might take the lump sum immediately, and then use part of the proceeds to buy a private lifetime annuity (or fund a guaranteed income of some sort) immediately, or when and if you need it.  This has the potential for providing a guaranteed income, albeit less than the pension plan would have provided, and a capital account as well which you can use or pass on as you see fit.  As we have seen, many issues that at first seem to support one approach, on closer examination may actually be better served by the other.  You need to start with an appreciation of the big picture and then look at the individual pieces to see how they fit together.

A well-defined purpose, realistic expectations, and informed planning are all critical, and your chances to get it right are greatly improved if you start with the right advisor. Someone with your needs in mind, who recognizes that his own best interests are served when yours are put first.


The opinions and views expressed herein ore those of the author and do not necessarily reflect the opinions of LPL Financial. DFS Advisors, LLC, is an independent entity and not a subsidiary or affiliate of LPL Financial. Any forward-looking positions or expectations here-in concerning investment performance are based on past performance which is not necessarily a predictor of future results. All investing involves risk including loss of principal. Guarantees are based on the claims paying ability of the issuing insurance company. You should retain competent financial and legal assistance before taking any final action on the basis of this analysis.

© 2019 J. C. Denton


[1] Medicare benefits are divided into "Part A" which is automatic and earned based on your payroll deducted insurance premiums, and "Parts B and D", which are optional and subject to an additional premium, usually deducted from your Social Security benefit. There is also a “Part C” plan which substitutes a private insurance HMO-like program for Medicare; what is and is not covered under each of these programs and whether you should participate is beyond the scope of this discussion. Suffice it to say that Medicare alone will probably not be sufficient to the needs of the average retiree. [Back]

[2] So-called “Guaranteed issue” programs are only guaranteed if you apply during certain open-enrollment periods. Not taking advantage of such a program when you first become eligible can result in higher premiums or can cause you to be declined for coverage for pre-existing conditions if you apply later. [Back]

[3] Medicare premiums are already higher for higher-income beneficiaries, and it wouldn’t surprise me to see means testing for benefits in the future as well. [Back]

[4] You should recognize the survivor benefit/offset pension entitlement for what it is; a life insurance transaction where the premium is the reduction in your monthly pension benefit and the death benefit is the amount of money needed to fund the lifetime entitlement of the survivor upon your death.. There is a viable alternative. If you elect the lifetime pension plan, you should discuss a "pension-max" strategy with a qualified retirement planner who is familiar with advanced life insurance planning concepts. Further discussion of this option is beyond the scope of this presentation, but would be a significant issue in evaluating your options if you elect a traditional pension benefit. [Back]

[5] Federal law provides that if you are married, you must elect at least a 50% survivorship option for your spouse unless he/she consents to a lesser amount. You will need your spouse's consent to take a lump-sum payout from your pension plan since to do so effectively eliminates their own entitlement to the survivorship benefit in your plan. [Back]

[6] A financial planner should be able to show you, using standard present value calculation methods, what the underlying rate of return is for your pension based on the lump sum offered, the life only pension amount, and your statistical life expectancy, available from various internet sources. [Back]

[7] See “risk factors” towards the end of the presentation. [Back]

[8] In my opinion "properly managed" means starting with and maintaining a goal of keeping the principal relatively constant. You have to plan as if you are going to live forever, at least until you know for sure that you won’t. [Back]

[9] Matching the pension fund number will not achieve your goal.  Big discussion- too much for this forum, but bottom line is if you only match the pension fund assumption you do not account for investment market or interest rate volatility.  Variability in in your own withdrawal habits and the possibility for life beyond your statistical life expectancy are aggravating factors.  The only thing you achieve by exactly matching pension fund performance is keeping control of whatever part of the pension funding that is left when you pass away. [Back]

[10] “Monte Carlo" gaming and modeling techniques will project and illustrate how variable returns, “frequency” of returns, deposits and withdrawals and the timing of those events will yield significantly different results even among portfolios with identical average rates of return. [Back]

[11] Typical answers are Fees based on assets under management (best for long-term relationship); Hourly rate (OK if you are engaging for a specific consulting need but probably not the best solution if you have an ongoing relationship). The hourly rate should probably compare to what you would expect to pay an attorney or CPA in your area for financial planning or estate planning advice and assistance.  A commission based model usually suggests a product-oriented agency and in today’s industry is widely seen as sub-optimal for both clients and advisors. [Back]