By JEAN C. SETZFAND
Special to The Hays Daily News
Last month, Detroit icons General Motors and Ford Motor Co. notified the federal Pension Benefit Guaranty Corp. they are terminating more pension plans -- an employment benefit that once was the cornerstone of American middle-class retirement security.
At General Motors, approximately 42,000 retirees and surviving spouses had to choose between receiving a one-time lump-sum payout from GM or receiving monthly checks for life from Prudential Insurance.
As employers race to shed their pension liabilities, millions of other Americans have faced -- or will face -- a similar dilemma. Do I take the big-dollar money and take my chances (trusting the stock market and my own judgment), or do I take smaller checks that supposedly are guaranteed to last a lifetime (trusting my employer, the PBGC or an insurance company to make good on them)?
In a 2010 survey conducted by AARP, most retirees surveyed said they prefer a lump-sum payment over a lifetime income annuity. Here are 10 reasons to suggest that -- most often -- the annuity is the better choice:
1. Besides Social Security, annuities are guaranteed income for life, no matter how long you live. For the past 30 years or so, American workers have been acculturated to put their faith in individual retirement accounts as the primary way to accumulate money for retirement. As a result, we've become fixated on our account balances -- a number that can grow through time, but also can change with the prevailing winds. Instead, figure out how much of your expenses will be covered by Social Security, then figure out your remaining expenses. Buying an annuity could help guarantee you will meet those needs. The rest of your money can be used for emergencies and investment opportunities.
2. A 65-year-old American male is expected to live to age 83.8; for women, it's almost 86. And those are just the Social Security Administration's averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. Annuities take some of the guessing game out of retirement planning, ensuring you'll have enough money to meet your basic needs no matter how long you live.
3. Because you just don't know. According to the Pension Rights Center, an annuity might not be the best option for you if you are in poor health and you will not have a surviving spouse who will need lifetime income, or you already have a substantial nest egg or other secure source of adequate income, such as a spouse's pension. But even people with severe health issues -- like my father, who had three primary cancers -- can live long lives due to medical and scientific advances. (He lived to 83 -- a whopping 20 years beyond his diagnosis date.)
4. Neither the stock market, a housing bubble, an interest-rate-fixing scandal nor a presidential election will impact your annuity paycheck. An annuity provides peace of mind when you need it most.
5. Annuities are "guaranty'd." Private insurers such as Prudential are required to pay into state guaranty associations to provide a pool of money to pay claims against bankrupt insurers. As the Pension Rights Center said, "For most people, the risks posed by taking a lump sum still outweigh the remote possibility that an established financial institution ... will not be able to continue to make payments."
6. Lump-sum formulas are not your friend. Lower interest rates mean higher lump-sum payments. But, to favor employers, Congress allows them to swap in a composite corporate bond rate that is higher than the Treasury rate. In addition, the formulas don't take into account women's longer life expectancy -- so women's lump-sum payouts usually are less than the total amount they would have received in monthly payments during their lifetimes.
7. You will most likely not "do better" by using your lump sum to buy your own annuity. It is more expensive to buy an annuity from an insurance company on your own, which means you'll end up with lower monthly payments. In the GM retirees' case, experts suggest a retiree could lose as much as 15 percent by buying their own annuity rather than accepting the Prudential policy. (In addition, GM is paying Prudential a 10-percent premium for each retiree who selects the annuity over the lump sum.)
8. You can buy protection against inflation. Many insurance companies offer inflation-protection riders that will give you cost-of-living adjustments through time.
9. You still can "leave something behind." It might lower your monthly payment or cost more, but some annuities will provide payments to your spouse after you die, either as a one-time death benefit or as ongoing payments.
10. Your financial adviser will probably not encourage you to buy an annuity. If your money is invested in an annuity, your adviser cannot earn management fees on it. Among themselves, some advisers even call annuitization "annuicide." Consider this potential conflict of interest when seeking advice.