Wes Moss is the host of the radio show “Money Matters,” which airs from 9-11 a.m. Sundays on News 95.5 and AM 750 WSB. CONTRIBUTED BY NICK BURCHELL

Wes Moss: How 6 percent rule can help with pension payout decision

Those of us who are fortunate enough to have an employee pension may face a difficult question one day — do we take our money in a lump sum or stick with monthly payments over time?

Companies are increasingly offering this type of deal to both soon-to-be retirees and former employees who are already retired and taking the monthly check.

If you’re wondering what’s in it for the employers, you’re asking the right question. As pension obligations increase while pension funds decline, companies are looking for ways to “de-risk” their future obligations — to reduce the companies’ long-term financial commitments.

Take some of these big-name corporations, for example. Ford proposed buyouts to 90,000 salaried retirees and salaried former employees. Delivery giant UPS offered 50,000 former employees lump-sum payments. General Motors approached 42,000 salaried retirees with a one-time check in lieu of monthly ones. And I’ve had clients who worked for AT&T and Coca-Cola receive offers over the past several months.

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>> RELATED: UPS reducing workforce with retirement buyouts

So why the rush to cut big checks — sometimes for hundreds of thousands of dollars? Because Americans are living longer. The average life expectancy for a man in 1950 (around the time of the proliferation of pensions) was only 68 years old. Today, the figure is close to 80. Couple that with the possibility of life expectancies growing even more over the coming decades, and you see why corporations have their check-signing pens ready.

Still, the most important point centers on former and current employees. Your company may come to you and ask you to make a trade-off: Lots of money today (typically rolled over into your IRA) or a modest amount each month over time. It’s a difficult decision to make. What should you do?

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The answer, as always, depends upon your individual circumstances. There is no “always” or “never” rule here, as everyone’s retirement landscape is different. To get more clarity about your particular situation, think in terms of the 6 percent rule.

As a general guide, if your monthly pension check equals 6 percent or more of the lump-sum offer, then you may want to go for the perpetual monthly payment. If the number is below 6 percent, then you could do as well (or better) by taking the lump sum and investing it, and then paying yourself each year (like a personal pension that you control).

Here’s how the math works: Take your monthly pension offer and multiply it by 12, then divide that number by the lump-sum offer.

Example 1: $1,000 a month for life beginning at age 65 or $160,000 lump sum today?

$1,000 x 12 = $12,000 divided by $160,000 equals 7.5 percent.

Here, you would have to make approximately 7.5 percent per year on the $160,000 to earn the same $12,000 a year. Earning 7.5 percent a year consistently and over many years is a tall order. Taking the monthly amount in this case (7.5 percent is greater than 6 percent) may likely be a better deal over the long haul.

Example 2: $708 a month for life or a $170,000 lump sum today?

$708 x 12 = $8,496 divided by $170,000 equals 5 percent.

In this scenario, the monthly pension amount is offering you a return for life of about 5 percent. Remember, for the first 20 years even earning zero percent, you could do the same before you run out of money. If you made even a modest return (say, 2 percent per year), you would be far ahead of what the monthly pension would pay you. In this case, 5 percent is less than the benchmark of 6 percent, so you might be better off taking the lump sum of $170,000.

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Keep in mind that a pension essentially pays you back your own money. On your own, you can withdraw 5 percent per year from any lump sum (even if the funds are earning a zero percent return), and the money should last you 20 years (5 percent x 20 years = 100 percent withdraw). Twenty years is a long time, especially when your pension may not kick in until age 65. Over those 20 years, you’ll get to age 85 without running out of money.

The point of using the above math is to illustrate that any monthly pension you elect to take over a lump sum, in my opinion, should be well north of a 5 percent annual return/payment, hence our 6 percent rule. At least for the first 20 years, a 5 percent withdraw rate will give you “income” by way of paying yourself your own money.

Of course, there are other factors worth considering beyond pure numbers if you’re faced with the lump-sum vs. monthly pension dilemma:

1. Your age when the monthly pension begins vs. when you would receive the lump sum.

2. Your projected longevity. Of course, the longer you live, the more valuable the monthly pension amount is worth.

3. The type of pension payout you elect. Is it based on your life only? Are there provisions for a surviving spouse? Is there a “period certain” option that pays plan beneficiaries for a time even if they pass away soon after taking the monthly pension?

4. The ability of the company to pay the pension for 20-plus years. Does the Pension Benefit Guaranty Corp. (PBGC) back up your payments if your former employer goes out of business? It pays to check. Also, keep tabs on your plan’s “funded status” — a measure of its assets and liabilities. If the number, which the plan has to report to you annually, is falling toward 80 percent, that’s cause for concern about your pension plan’s solvency.

5. The likelihood that you’ll need a hefty sum for a future emergency, or if you would like to leave money to your heirs. Consider the lump-sum offer in the context of your retirement goals and your other assets.

As you can see, there are a lot of factors to consider in the lump-sum vs. monthly pension decision process. And the answer to your question is highly individual. Take the first step and do the math to see how your offer fares under the 6 percent rule. This is where I start when helping families make this difficult choice. Beyond that, weigh the variables above to see which way the scale tips for you.

Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.

DISCLOSURE

This information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment adviser before making any investment/tax/estate/financial planning considerations or decisions.

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