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Take Your Lump?

The bulk of our subscribers hail from the Puget Sound area and many are facing a looming and important deadline on October 31st. Will Halloween bring former Boeing employees a trick or a treat. That’s the last day for many ex-workers to decide between trading in their Boeing pension  for a lifetime monthly payment or a lump-sum payment. It is a complex decision for which there is no simple answer.

The question really boils down to two points to consider:

  • When do you need the income?
  • How much risk are you willing to take?

No matter what your income needs, if you are totally risk averse take one of the monthly annuity options (either for your lifetime or that of you and your spouse jointly). This is a very low risk choice with a decent payout.

If you understand investing and the are willing to accept some degree of volatility, you might want to take the money and run to an IRA (or a Roth if you can afford to pay the taxes on the distribution). Here how to decide:

If you won’t need the income for five years or more and can invest it in a diversified equity and fixed income portfolio with the potential to earn an average of 5% per year or more, taking the lump sum probably makes sense. This choice probably involves placing 40% or more of the distribution in a globally diversified equity portfolio. Historically, this has meant accepting a single year loss of about 25%. If that sounds too frightening, take the income.

If current income is needed and you are very comfortable with market volatility, a lump sum distribution only starts making reasonable sense if you are able to build, and survice the volatility of, a portfolio aggressive enough to possibly generate a 7+% average annual return. An average return of that amount probably means investing more than 60% of the money in equities. Based on the past 50 years, that would have meant living through a one-year 35% loss.

There is no risk-free lump-sum distribution option. To make more than Boeing is offering through their immediate annuity payment option requires accepting the occasional terrible market. There is no wealth without risk. That means that, no matter what a salesperson might promise, you can’t have a guarantee and a high return (on anything)!

Q&A: When to Move?

How Much You Need II