Q&A: Pension Worries

A reader is about to retire but is concerned about the safety of the company plan and is looking for other options.

Q – If one is about to retire and has the option of a defined benefits pension plan (which includes benefits) or cashing out (and still getting benefits), what is the best option?

Assuming that there is some risk with the pension in the long term (e.g. long-term survivability of company), is cash out a good option? Are there any reasonably secure investments that could provide about 5% return? This would be about 70%-80% of the monthly pension income but would be acceptable, considering the long-term pension uncertainly. – Chris C.

A – In most cases the defined benefits pension plan provides greater certainty but you seem to be worried that the company sponsoring the plan could run into trouble and leave you stranded. Certainly, that has to be considered in making your decision.

The other side of the coin is the risk in investing yourself. Any investing with a 5% return is going to carry at least some measure of risk. Another alternative is to take the cash out of the plan and buy an annuity but then you run the risk that the insurance company will go under, which has happened. There is some industry coverage that would protect at least part of your annuity in that event but perhaps not necessarily all, depending on the amount.

In short, there are no guarantees. Unless you feel strongly that you need to get out of the pension plan (maybe you work for BlackBerry!) I would say that sticking with it is the least risky approach. – G.P.

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