If you receive a lump sum offer for your pension think twice!

My wife recently received a pension buyout offer from her former employer, a publishing company.  I ran the numbers and discovered that if she took the lump sum, she would have to earn approximately 6.5% every year on that sum for it to equal the value of the monthly pension payments she would start receiving at retirement age.

Now, this calculation will vary for people of different ages, health, and gender (due to the greater life expectancy of women), and for some people accepting the cash from this particular employer could make sense.  But I advised my wife not to accept the lump sum. Yes, it may well be possible to earn 6.5 percent annually by investing the windfall in a rollover IRA. However, good luck getting a 6.5 percent rate of return with the same level of risk as the pension.

You would have to take much larger chances, investing in stocks or junk bonds, for example, to potentially get a return of that magnitude.

Of course, there is some peril to holding out for the monthly pension checks. The company could file for bankruptcy and seek to terminate its pension. But if that happened, the Pension Benefit Guaranty Corp. would very likely step in and cover most of the unfunded pension obligation. My wife’s pension would be small enough that the entire amount would be insured. Not all pensions are guaranteed. Please see the PBGC website (http://pbgc.gov) for important information on the types of plans that may be insured, as well as coverage and benefits restrictions, exemptions and limits.

Companies like my wife’s former employer would love their workers to accept their offers. Why? Because it’s great for the owners.  If the company thinks it’s a good deal for them to swap cash for your pension, give it a careful look and maybe consult a financial advisor.