It may be decision-time for your GE Pension
Our offices sit about 15 miles from the birth place of General Electric, where GE had its first headquarters. As a result, we have a number of clients that have family ties to GE that go back generations and it seems that news regarding GE tends to make a big splash amongst our clients and acquaintances in the Capital District.
On October 7th 2019, General Electric announced that it was freezing the pensions of over 20,000 active workers, and offering to buyout the GE pensions of over 100,000 former employees. Much has been written regarding the issues plaguing GE as a company in recent years, but for many ex-GE employees, this announcement leaves them with a decision to make.
This short article will focus on those ex-employees that have been offered a lump-sum payout by GE and review the major points to consider before making your final decision. It is worth stating here that this is a complicated decision that should not be made without proper consideration of your ‘big-picture’ financial plan. You should absolutely consult your tax and financial advisor prior to making any decision.
Why would GE offer a lump sum payout? Put simply, if you have a pension with GE that you plan to collect, that essentially means that they owe you money in the future. You are an IOU (debt) on their balance sheet, as pension obligations are looked at as debt for a company. Generally, a company offers a lump sum payout of a pension in order to remove you as a debt from their books. Think of a lump sum buyout as a way for GE to pay off a bunch of IOU’s and get you off their books. It makes sense why a company like GE and many others would do this, but should you take them up on their offer?
First, start by considering these 3 basic guidelines:
Health: How is your health? Do you expect (based on family history and illness) to live a long life? If you are sick or don’t expect to live very long into retirement, then a lump sum is likely the best bet for you.
Control: How much control do you desire? This refers to control while you are alive and when you die. While alive, a lump sum gives you the ability to dip into the lump sum for cash if needed. You can also control where and how it is invested. When you pass away, you also have control about where the lump sum goes (to kids, charities or another beneficiary). With your monthly payment option, once you and your spouse pass away, no one else benefits from the pension payments.
Overall Financial Picture: How does this fit into your ‘big-picture’ plan? Making this decision without considering your retirement plan and sources of retirement income is dangerous. You need to spend time looking at all your sources of retirement income, compare this to your expenses and then make an informed decision in this context. A financial plan can help you with this analysis.
In addition to the considerations above, think through the following pro’s and con’s of the lump sum option:
Con’s of a lump sum:
Not guaranteed
The monthly payment option is generally guaranteed for life. Taking a lump sum puts the pressure onto you to make the money last.
Easy access can mean over-spending
Having access to the lump sum is a benefit, but if you struggle with overspending, having a pot of accessible money may be difficult to resist.
Pro’s of a lump sum:
Control of funds
As mentioned above, having control of funds while alive and when passing is a major benefit of the lump sum option.
Can defer until needed
Say you get a buyout offer but you are still working. It may be more beneficial to roll the lump sum into an IRA to avoid paying taxes on it and continuing to let it grow until you need it.
Flexibility to manage taxes
In line with the point above, being able to control the timing of receiving the cash flow from your pension can help you manage taxes. As an example, a client called last week about the GE buyout option. She was scheduled to start receiving her monthly GE pension payment at age 60. The trouble is that she plans to work until at least 65 in a high-earning career. Adding pension income to her existing high salary didn’t make sense. The ability to roll the lump sum into a 401(k) or IRA allows her to grow the funds while still working and avoid the tax impact of taking this extra income until she retires.
Action steps:
Spend time thinking about the points above
Crunch the numbers by performing a breakeven analysis
Look at this decision in the context of your ‘big-picture’ retirement plan.
If #2 & #3 sound overwhelming, give us a call and let us help. That’s what we do every day for other people and we’d love to help you too.