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GM Retirees Must Decide Today On Lump Sum Payout

After presumably agonizing for weeks over whether to keep their lifetime pension benefit or take a one-time lump-sum payment, some 42,000 General Motors retirees are faced with making that critical decision today.

And there is no turning back. No do-overs.

GM set Friday as the deadline when it offered its former employees and surviving spouses the choice to retain their monthly pension, which will be switched to an annuity provided by Prudential Insurance, or receive the lump-sum equivalent in one payment. That decision will affect the rest of their retirement years.

GM has said the move would eliminate about $26 billion of its pension obligations.

For pensioners John and Kathy Matthews, the decision came down to this: Accept $818,000 in a lump sum or keep collecting $4,854 a month, according to a story that interviewed the couple. They still hadn’t decided what to do as of early Friday, despite consulting with numerous financial planners.

The Pension Rights Center’s Karen Friedman, in an op-ed piece in the Detroit Free Press, blasted GM for putting their pensioners in a precarious situation. She also urged them to refuse to the lure of the lump-sum payout.

“GM’s decision to off-load their pension plan has put this group of retirees in the agonizing position of having to make a decision that will impact them for the rest of their lives, at a time when they are most vulnerable,” Friedman wrote. “While anger and distrust might fuel the temptation for retirees to take the lump of cash and run, the reality is that taking the annuity will be the far better and safer option for most retirees.”

Undoubtedly, many of these retirees and surviving spouses, who’d been getting a pension for years, felt frightened and confused by the offer. Taking a lump sum payment was enticing. Keeping a pension payment still involved a change — Prudential, not GM, would now be paying those benefits.

Studies show that retirees with monthly pension payments are more secure than those without them. They’re better able to pay for housing, health care and daily necessities. Also, those with predictable monthly income and “unaffected by the whims of Wall Street can sleep better at night knowing that they have a stable income for life, no matter how long they live, and that their spouse will be protected, too,” Friedman wrote.

Ford also announced it would give a similar one-time offer to eligible former employees in August.

Pension experts say they expected other companies that offer traditional defined benefit pensions to follow suit and offer their employees a similar swap. Many employers are seeking ways to get rid of their pension obligations and are shifting that risk to the retirees.

Financial planners say that taking a lump sum can be risky because retirees will have to invest that money in a volatile stock market to earn dividends or grow principal.  But unlike a pension, with its steady payouts, results will be anything but guaranteed.
So who should take the lump sum? Friedman quoted economist Alicia Munnell, director of the Center for Retirement Research at Boston College:  “Only those with serious illnesses who believe they do not have much time left should even consider it. The trouble with counting on death, however, is its unpredictability; even sick people may live longer than they think.”

The lump-sum deal may also be good for adults with abundant assets for whom the pension is not their primary source of income.

photo credit via flickr.com