Gordon Powers

Thousands of U. S. retirees are suddenly grappling with the largest financial dilemma of their lives now that two of the country's largest carmakers have launched massive pension buyout plans.

In order to trim their pension obligations, both Ford and General Motors are giving formerly salaried retirees a chance to trade their monthly pension cheques for a lump-sum payout instead.

Once they receive their individual proposals, these retirees will have 90 days to make a final decision on the one-time offer. Talk about a life-changing decision.

In both instances, the companies involved are anxious to eliminate the investment risk in their pension plans, as well as avoid future costs as retirees live longer than expected.

Fed up with the steady drain on their resources, they really just want to get out of the pension business altogether. And some Canadian companies may not be that far behind.

It's a tempting offer. For a long-time Ford employee with a $3,000-a-month pension, a lump-sum buyout might easily be worth as much as $500,000. But guess who gets stuck with the subsequent investment risk instead? The retiree, of course.

A pension protects you from longevity risk — in other words, living too long and outlasting your money. Should you forego this surety, particularly if you've already retired? Well, first you should ask yourself about how you've been doing with any other money you might have.

Even if you think you have the wherewithal to manage that amount now, it's only going to get harder as you get older. Most peoples' tolerance for investment losses and subsequently fluctuating incomes drops sharply as they age, so producing the returns you need gets increasingly tougher to do.

As we age, our brain gets more impulsive and we're more easily swayed by our emotions. The reason, researchers say, is that many older people stop making decisions using logic; they're driven less by numbers and logic than they are by feelings and passion, which can have a negative impact on returns.

There are several other factors to consider when making the decision: whether the amount offered is reasonable, the long-term health of the company you once worked for, and how anxious you are to leave any money to your children.

The numbers used by companies when designing buyouts are regulated — although recent changes to U.S. pension law now make it less expensive for employers to make such offers. They also include assumptions that may or may not play out in the future.

For instance, because interest rates are exceptionally low right now, the amount of any offer has to be big enough to offset this. The lower the interest rate used in the formula, the higher the lump sum.

Gender is another factor. Women generally come up short in lump sum formulas. The average female outlives her male counterpart by roughly four years, yet the calculations used are typically gender-neutral, reducing the potential payout.

Many pensions also include an annual inflation adjustment, which you'd be giving up. Without such indexing, you end up paying tomorrow's prices with today's dollars, again increasing the need for increased investment returns on that lump sum.

Consider what happens to someone who retires at age 65 and lives to age 85 with no indexing to offset average inflation of 2.5 per cent per year.

By age 70, for every $1,000 per month you received at age 65, the pool's real value (in dollars with the same purchasing power as you had at age 65) is worth only $884.

By age 75, the real value is only $781, and by age 85, only $610 — a loss of more than a third of the original value.

Then there's the long-term health of the company, something Nortel pensioners have learned the hard way.

If the outlook for your former employer seems suspect, it may be wiser to take a buyout. If a company goes bankrupt, your pension could be at risk even though a portion of it might be covered by provincial guarantees.

There may be certain instances where having the lump sum might work to your advantage, however. Someone with a family history of not living very long might prefer to get the money up front, since they would have more to work with in their early retirement years.

As well, if the monthly pension wasn't your only source of income, you might be able to leave more of a legacy for future generations. Surviving spouses continue to get monthly pension benefits after your death, but that's where things stop.

If you get offered a pension buyout, be sure to talk this one out with a trusted advisor, preferably someone who isn't necessarily interested in managing this newfound money for you.