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Susan Tompor: Ford’s lump-sum pension offer is tempting, but run the numbers first

Published: April 28, 2012 | 8:38 am
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About 90,000 salaried retirees and former employees from Ford will soon decide whether they want to get a pension check each month or grab a bundle of money and go.

On Friday, Ford announced an unusual move to offer a lump-sum option to a select group of salaried people as an alternative to a traditional pension. Ford isn’t ending its pension for salaried employees and retirees, it’s just offering a lump-sum option now to some folks.

The idea is for Ford to limit its own costs and risks associated with such a large, ongoing pension plan.

“We expect this will be a onetime offer,” said Marcey Evans, a spokeswoman for Ford.

So is this like a big win in the lottery? A great way to pay off that house and move on? Not quite.

We’re not sure which kind of lump sums individuals could be offered. But some financial planners say some Ford salaried people who are in their late 50s and have been at Ford for decades could be looking at payouts of $300,000 or $400,000, or more.

Evans said Ford cannot provide a range now because amounts will vary depending on various individual factors.

Ford plans to put salaried retirees and former employees into smaller, separate groups on a random basis. Each group would have a few months to complete the process.

“We expect to complete all groups sometime next year,” she said.

Before anyone goes out and buys a boat on Friday’s news, though, it’s best to seriously run the numbers.

You need to understand what kind of lump sum you’re getting and how much money you need to generate in retirement.

“It’s worthwhile for anybody to look at it,” said David Kudla, CEO and chief investment strategist for Mainstay Capital Management in Grand Blanc.

He said the lump sum could give people more options for managing the money and withdrawing it in retirement as they see fit.

But what will you really have each month for retirement if you take a lump sum now?

“If you’re deciding to take a lump sum, you’re assuming the investment risk,” said Jason Close, a financial adviser with Capelli Financial Services in Bloomfield Hills.

Some people could do well managing the lump sum; others would face problems.

“It really is a case-by-case basis,” Close said.

Jim Knaus, a certified financial planner for Global Wealth Advisors in Troy, agrees that it will depend heavily on individual situations.

“I’d want to consult with the person, determine needs, objectives, assets, liabilities, cash flows, health, life expectancy and other facets,” Knaus said.

People, of course, must understand what they’re giving up in exchange for the lump sum.

A defined benefit pension offers some certainty and provides a lifetime of income, no matter how long you live, and includes survivor benefits for a spouse.

“It provides a floor of income,” Knaus said.

If someone chooses the lump sum, Knaus said, they need to carefully consider their current financial picture and their outlook in retirement.

“What they risk is running out of money,” Knaus said.

Financial advisers said it’s hard to say whether the Ford offer is a good or bad deal overall, as more details need to be released for individual offers.

But are there some people who should absolutely avoid any lump sum?


Somebody who has a gambling problem or knows they’d immediately go on a spending splurge that wouldn’t end until all the money ran out shouldn’t take that lump sum, Knaus said.

Question: Are there steps I can take before I talk to a financial planner or the company’s human resources department?

Answer: Yes. First, calculate how much income you’ll need. Create a budget that estimates all the expenses you’ll face in retirement. Most financial institutions with which you already have invested will have an online planning program. To the extent you can, divide your expenses into two broad areas: necessities and discretionary spending.

Q: Are there ways I can reinvest a lump sum that allow me to continue receiving monthly payments ?

A: You can take the lump sum and purchase an annuity. But if the payments from the annuity are less than what you would receive under your pension, clearly, you tell your employer, no thanks. Keep in mind that the quote you get for an income or immediate annuity generally will change week to week as interest rates fluctuate.

Q: Will the company be in sound financial condition for the duration of my expected life span?

A: In Ford’s case, everything looks solid today. Still, as evidenced in recent years, the auto industry has been on some harrowing roller-coaster rides in its history.

Q: If I can retire at 62 with a lump sum of $200,000, or regular monthly payments of $1,400, which is better?

A: That depends on your larger retirement savings. Do you have separate 401(k)s? Do you have a spouse with a defined benefit or defined contribution retirement fund? Do you plan on finding another job or starting a business? Getting a monthly check as long as you live may sound ideal, but that income stream is rarely adjusted for inflation (at least with corporate pensions), and monthly payments could put you at a disadvantage should you need access to a large amount of cash later.


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