Much of the financial news this summer has revolved around Ford’s new pension plan, which sprung into action in August. The plan offers lump sum buyouts to about 98,000 people, mostly Ford retirees or surviving spouses, as well as former employees vested in the plan or salaried workers in the union, from their current pension plans. The plan is being rolled out among small portions of this group, about 15,000 people at a time, allowing them to opt out of their long term pensions for a more immediate sum. As these offers arrive in the mailboxes of more and more people, there is a growing need for these people to understand the facts and figures behind this offer and their life altering decision. Knowledge is power, and this case is no different. Here are 5 things people need to consider before making this crucial decision.
- Ford’s Motivation: They aren’t offering this lump sum out of the goodness of their hearts for the benefit of the retirees. Ford Motor Company is sitting in a 50 billion dollar pile of pension liability and this new plan allows them clear out about a third of that and create some breathing room moving forward. This isn’t to say that Ford is hanging its retirees out to dry, as many will benefit from accepting the sum, but the decision to accept isn’t as much of a no-brainer as it has been in years past.
- Calculated Sum: There is no set sum offered to everyone, and the numbers given to each individual are far from arbitrary. The dollar amount offered to each retiree is based on a variety of factors in a set calculation. These factors include things like age, years with the company, years retired from the company, interest rates and so on. This is one of the things that makes the decision so difficult. Your characteristics that comprise your formula are very different than anyone else’s, which makes each situation unique. Keep in mind, this plan was created to save Ford money, which means with those calculations they plan on the average lump sum being less than the average life-time worth of pension payments.
- Interest Rates: Years from now people will be looking back on their decisions, judging whether they went the right route. One of the biggest determinants of this success is based on interest rates. If you are certain you can do better than the rate of return used to calculate your lump sum amount, than you should take the money and run. On the other hand, if you take the offer, and your investments have a lower rate of return, than you will have lost money on the deal. Right now, we are sitting a low rate environment, which makes the pension itself worth more, but for the future, it’s something of a guessing game.
- Personal Health- one of the biggest factors effecting whether the lump sum is a good or bad choice is a person’s life expectancy. This factor is also one of the hardest to determine. If you die tomorrow, the lump sum would be the wise choice. If you live to be 120, the pension payments is the way to go. Chances are, your reality will be somewhere between the two. By knowing your personal health situation, you can make a better decision in terms of calculating the value of each. This is especially important for women. Pension lump sum calculations are not allowed to take gender into account, so the longer life expectancy for women puts a point on the “pro” side of long-term pension payments.
- Investment Plans- If you go the lump sum route, the hard work isn’t over once you get the check. Actually, it’s just beginning. If you take the lump sum, only to go bury it in the backyard, you won’t being doing yourself any good. Last I checked, Mother Earth didn’t offer much of an ROI. Have plan of action in terms of what you plan to do after you receive the payment. Get professional advice and make a wise decision based on your finances, your portfolio and the level or risk you wish to take on.
Ford retirees are facing a difficult decision, but knowing the factors that affect that choice and their success with it, can make it much more simple. The most important asset in this scenario is time, and the ability to use that time to weigh all the options and all the repercussions, both positive and negative. Time is money and knowledge is power, and if you take your time and gain the right knowledge, you may just find yourself with both.
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