An increasing number of your clients are facing the novel possibility of choosing a lump sum payout from their pensions instead of the traditional annuity option. Recently, General Motors and Ford have made headlines with their pension buyout offers, but this is a trend that is likely here to stay for the wider market. Before choosing whether to remain with the annuity option, which is perceived as a safe bet by many, or opt for the lump sum, there is one thing that every client will need—your advice.
The lump sum option is a once-in-a-lifetime possibility for many clients to customize their retirement income stream, yet it is a decision that few should make on their own. Have you considered how you will advise?
Managing client expectations
Because your clients may not consider all the pros and cons of the buyout option, it is important to manage their expectations. Many will be eager to take the buyout, believing that they can invest in the equity markets and beat the returns offered by their corporate pensions.
This is unlikely. We all know how the stock markets have performed in recent years, and it would be a fluke for a novice investor to realize significant gains through equity investing (of course, if you manage money for your clients, you may have a different opinion.)
Additionally, the sums offered are, in many cases, more money than your client has ever seen at one time. Because your clients have not done the math, many will not fully grasp the reality of what they are receiving—the lump sum offered today will be some portion of the amount that they would receive over a lifetime of pension payments, not the entire amount.
For your clients relying on their pension for living expenses, it is critical that they understand the need to properly manage these funds, rather than using the seemingly large sum to live a more elaborate lifestyle.
So, what should your clients do with that lump sum?