Know when to take your lumps when retiring

Once I push myself away from the Thanksgiving dinner table, it seems to me that the remaining portion of the calendar year moves at lightning speed.

There’s an abundance of year-end items that need to be taken care of in just a few short weeks. If you’re in your late 50s or early 60s and employed by a large company, let me add one more item to your list.

If your company has a frozen pension, ask your HR department for a handful of retirement projections covering a variety of retirement dates over the next few years. You might be surprised at what you discover.

To set the stage, interest rates are extremely low. Bank deposits earn next to nothing and mortgage rates are about as low as I can ever recall. The surprise is how these low rates can impact your frozen pension account.

Pension fund managers need to be somewhat cautious in the manner they invest pension funds. Hence, much of the money is in relatively safe, low-interest bearing funds to meet their pension obligations. In this low interest rate environment, that translates into a larger lump sum compared to just a few years ago.

Consequently, if your company offers the choice of a lump sum buyout in lieu of a monthly pension check, you just might be sitting on a once-in-a-lifetime opportunity and not even realize it.

I recently encouraged a client in his late 50s to ask his employer’s HR department for year-end retirement projections for 2014, 2016 and 2018.

Since the pension is frozen, retiring now and taking the traditional pension wouldn’t be much different than if he continued working until 2018.

However, the lump sum offers provided by the HR department were quite interesting. If he took the lump sum now or in 2016 or 2018 the amount would be virtually the same. In other words, he could retire now and receive a lump sum of $500,000 or wait a few years and collect the same $500,000.

Mathematically and historically speaking, there is every reason to believe that a $500,000 lump sum today would be worth more than the same $500,000 lump sum a few years from now.

In my client’s situation, other than any new 401(k) deposits and company match, there’s no compelling reason for him to stay with his current employer. In fact, you could even argue that, since his benefits are frozen and not growing, by staying on the job he is effectively taking a reduction in pay.

In this low-interest environment, where my client’s speciality is in high demand, and because he is somewhat disenchanted at his current place of employment, he should consider taking the lump sum and retiring now. Then, if he wanted, he could seek new employment with comparable benefits somewhere else.

By investing wisely, his lump sum could actually grow over the next few years, and at actual retirement some years later, he could have a considerably larger nest egg than if he stayed on course.

I believe many of my readers may be sitting on a similar opportunity and not even be aware of it. Take the time to request your retirement projections. If the lump is a viable option, discuss it with your financial adviser, along with ideas for investment.