Ford Pension Decision – Find Out What Really Matters

 Back in May 2012, Ford Motor Company announced plans to offer pension lump sum buy out payments to 90,000 retirees (see my blog).  Not to be outdone, General Motors announced a similar program shortly thereafter (see my blog).   As our firm began to see many in the financial services industry swarm to get a piece of the lump sum money pie …. we issued a Consumer Alert to retirees faced with the lump sum decision (see our blog here).

Since these early writings, we have consulted with several retirees to assist in making an appropriate decision based upon their unique circumstances. Moreover, we have continued to be a resource to the local and national media.

On July 18, 2012, I shared my observations with Channel 4’s Business Editor, Rod Meloni, that there are a few financial decisions in our lives we need to get right and this is one of them, quite frankly.

Earlier this month, Melissa Joy, CFP® and I were interviewed for a story by the Dow Jones News Wire (see our blog here).  The story illustrated that there are non-financial factors that should be considered in making the lump sum decision.

So, after multiple individual consultations, contributions to the media, and internal conversations with my colleagues, I share what I believe to be what really matters in making a suitable decision as it relates to continuing a monthly pension or taking a lump sum buy out:

1. Life expectancy: While not the most enjoyable topic – your life expectancy as compared to the IRS life expectancy tables [the table used is a “unisex” table] is a critical factor.  For example, a 65-year-old man or woman has a life expectancy of 84.14 years; a 70-year-old 85.25; and an 80-year-old 88.61. YOUR life expectancy is based on YOUR health, heredity and lifestyle.  Is it longer or shorter than the IRS life expectancy? If shorter, taking the lump sum is more appropriate.  If you expect it to be longer, consider continuing the monthly pension. If you know exactly when you will die, the decision is pretty straight-forward.  But, assuming you don’t know that date … there will be a degree of uncertainty in the decision.
2. Assumed rate of return if lump sum invested: Federal law governs what rate employers must use when computing the lump sum. The rate is a blended corporate bond rate that is based on age and may fluctuate month to month. The rate for a 65-year-old is near 4.25% and is lower for older ages. If your plan is to invest in vehicles that are expected to return less than the rate used to compute the lump sum, and you have an average life expectancy, then continuing the monthly pension makes more sense.  Hypothetically, five year certificate of deposit rates are currently 1% or less.  If that is your investment plan for the lump sum, it will be hard to generate more income from a lump sum so you may want to continue the monthly pension.
3. Unique circumstances: What unique circumstances do you and your family have? As I shared in the Dow Jones story, even though the number crunching may suggest one decision – the non-financial decisions might just trump the numbers. Do you have the discipline to take only monthly withdrawals equal to your previous pension if you take a lump sum?  Are you likely to give money away to others such as children when you really shouldn’t?  Do you have a gambling or substance abuse issue?  In one case, our client determined that they were likely to provide support to their kids (to their own detriment) if they had a lump sum. They therefore chose to continue the monthly pension.   

Ford and GM sure have stirred up both excitement and anxiety for many retirees.  While the GM Pension offers have come and gone, Ford salaried employees will be receiving offers and making these decisions going forward. The decision to continue a monthly pension or take a lump sum is an important one and one that you need to get correct.  To make an appropriate decision, you need to do the number crunching and consider the non-financial aspects.  Please let us know if we can help reduce some of the anxiety and assist in making a suitable decision based on your unique circumstances and goals.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.  Prior to making an investment decision, please consult with your financial advisory about your individual situation.

Want Another Reason to Consider Keeping Your GM/Ford Pension?

 Thousands of GM and Ford retirees across the nation are struggling with one of the most important decisions of their financial lives – whether to keep their current pensions or take a lump sum offer.  We support the case for each of these individuals working with their financial advisors to carefully analyze their particular situation.  But, before a final decision is made, recent statistics may give reason to pause and consider one more important factor in the puzzle. 

According to Dr. Michael Finke, professor at Texas Tech University, beginning between the ages of 55 – 59 (and certainly after age 60) we begin to lose our cognitive ability at the rate of about 2% per year.  Professor David Laibson, professor of economics at Harvard University, references research showing that between the ages of 65 and 69, 1.7% Americans are affected by dementia, and this number doubles every 5 years.  Even though financial capacity decreases, Dr.Finke indicates that confidence in financial decisions does not decrease.   So, our decisions aren’t as good as we think they are?

What does this have to do with the GM and Ford pension decision?  The potential for diminished financial capacity, combined with continued confidence in financial decision-making ability, may leave many Americans susceptible to poor future financial decision making and/or financial fraud.  By adding an annuity (a.k.a. the pension) – a monthly income stream that is locked into place – older adults may be hedging against these future dangers to their financial lives.   

If you or someone you know is still facing the GM or Ford pension decision and would benefit from an individual analysis of their situation, contact us for assistance.  And dig a little deeper into making this important decision by referencing additional blogs on this topic.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Consumer Alert: Have GM and Ford provided one of the greatest Money Grabs for the Financial Services Industry?

 

The automobile industry has played an important role in many Michiganders’ lives. I recall my own great-grandfather Mel working for Ford Motor in Dearborn. Mel was able to provide my great-grandmother and their children (my grandmother) a comfortable middle-class lifestyle thanks to his work there. Today, hundreds of thousands of people—both current employees and retirees--continue to depend upon automobile companies to help care for their families. 

Ford and GM have both recently announced changes to their pension benefits affecting an estimated 130,000 retirees. More of the details are laid out in my two recent blogs (May 4^th blog titled “Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?” and June 13 blog titled “GM Pensions to Follow Ford...With a Twist”), but the essence of the change comes down to choosing between (1) continuing to receive a monthly pension check that will be payable for the rest of your life, and (2) electing to forgo monthly payments and taking a one-time lump sum. 

Consumer Alert: Let’s face it – the financial services industry doesn’t have the greatest track record. Several firms in the financial services industry are already geared up to get their share of the lump sum payments via “free” seminars and “free” consultations. I am sure many of you were given the same sage advice my great-grandfather shared with me one time: there’s no such thing as a free lunch. 

Those in the financial planning industry get compensated in a variety of ways: fees, commissions, or a combination of both. Professionals that provide value deserve to be compensated. However, some advisors in the financial services industry do not get compensated for advising you to continue to take the monthly pension. And yet, this might be the most prudent decision for anyone with a normal life expectancy. 

Financial advisors/consultants/salespeople/insurance agents/stock brokers are often biased for you to elect the lump sum option. A professional financial advisor will start with a clean slate – learn about your unique situation and objectives – and then provide tailored recommendations based on the tradeoffs between the options. Any advisor advocating only one option should be avoided. 

What to do? The tricky situation with the GM and Ford offers is that general rules and rules of thumb just don’t work. You must take a lot of factors into consideration. So, run the numbers (you are encouraged to consult with a financial planner and/or tax advisor) and then weigh the risks before deciding. We have been working with several clients over the last few weeks. In some cases the lump sum offer made the most sense, but in others, we advised sticking to the pension option. Each situation is unique, and we have come to different conclusions based upon their individual circumstances, so make sure you are getting the best advice possible and not just a “free lunch” offer. 

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?

 On April 27, 2012, Ford Motor Company announced via an internal communication a voluntary lump sum buy-out offer for 90,000 retirees and surviving beneficiaries.   Essentially, Ford wants to pay off or pay out as many retirees as possible.  So why of the sudden generosity?     There are two primary reasons:

1. To get retirees off the books. Paying lump sums will get the pension liability off of their company balance sheet – which according to Bob Shanks, Ford executive vice president and chief financial officer, will "improve the underlying strength of our balance sheet”. And,

2. The math looks better in 2012. The Pension Protection Act of 2006 (“PPA”), fully in effect in 2012, allows companies to use the higher yielding corporate bond rate versus the lower Treasury rate when calculating lump sum payments; making the cost of a lump sum lower to employers such as Ford.

Point 2 forces us to further consider how lump sum payments are calculated (for all employers – not just Ford Motor) and its impact on our decision making process.  

How the Math Affects the Company and Retirees

First let me apologize to all of the actuaries (i.e. number crunchers with serious calculators) for grossly underestimating the complexity of the calculation.    Calculating a lump sum takes into account factors such as your specific income, years of service, age, and survivor’s age, if any.    In addition, a “discount” rate is used in determining how much all of the monthly payments (present value) would equal if paid in a single lump sum today.   Why is the discount rate important?

1. The higher the discount rate, the smaller the lump sum.

2. The lower the discount rate, the greater the lump sum.

On a relative basis, with general interest rates near historical lows, lump sum payments should be higher than say 10 years ago.  However, the change in the discount rate via the PPA significantly reduces an employer’s lump sum payment obligations – perhaps by as much as 30%. So while Ford has had a desire to offer this type of payout in the past – waiting until 2012 provided a lower cost.

So, let’s agree for the moment that this plan is good for Ford’s balance sheet. However, there is a far more important issue: Is a lump sum good for your finances? Are you better off receiving a one-time lump sum payment rather than guaranteed lifetime monthly payments (guarantees based on For Motor’s ability to continue payments)? What’s good for the company….may or may not be good for you. (I don’t say this lightly – growing up in Dearborn I witnessed firsthand Ford’s exemplary community stewardship). I do however suggest taking a page out of Fords book – run the numbers to see what is most appropriate for you.

Is it good for your finances?

So how much is at stake? Plenty. For example, a 60 year old male entitled to a $2,000/monthly pension might be offered a lump sum close to $600,000 depending upon the actual discount rate used (this is a hypothetical only assuming a single life payment and 3.5% discount rate). Depending upon your unique circumstances this might be a “good deal” – but it might not.

On one side, if you are someone with a long life expectancy and very risk averse you should consider declining the lump sum and sticking with the monthly benefit.    On the other hand, if you are single and not in good health, taking the lump sum might be a better option. As you might expect, most folks will fall somewhere in between these two extremes.

At the risk of stating the obvious, this is a complex and important decision, and you are encouraged to consult with a financial planner and/or tax advisor. Talking with an experienced advisor about your personal situation can help lead to an appropriate decision focused on your balance sheet.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.