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Grab Your Pension Money and Run

An unstable economy is leading many to cash in their pensions early. Should you?

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First, the steelmakers reneged on their pensions. Then the airlines. Now that parts-maker Delphi has entered bankruptcy, many are warning that the automakers will be next to walk away from their promises to pay a monthly stipend to retirees.

No wonder many financial advisers are recommending that workers and retirees grab their pension money and run. Rather than trust an employer to keep sending those monthly pension checks for the next 20 or 30 years, anyone hoping for a comfortable retirement should ask for the value of the lifetime pension in one quick, upfront lump sum, they say. That way, new retirees can invest the money themselves or buy a privately insured annuity (from a reputable company) that will pay off no matter what happens to their old employer.

That sounds tempting. But experts who aren't trying to earn commissions or fees say that only a few kinds of workers should grab the lump sum. Just 34 percent of nonfarm workers are lucky enough to be earning a traditional pension. And most of those enrolled in pension plans don't even have the option of taking a lump sum, including:

Anyone who is already drawing a pension. Most plans don't allow retirees to change their minds and later draw a lump sum.

The 52 percent of private-sector workers vested in plans that don't offer a lump-sum option. Unfortunately for most auto-industry workers, for example, the United Auto Workers' pacts generally don't allow retirees to take lump sums. Most public-sector workers also aren't given a choice.

Among those who do have a choice, those who would do better financially to stick with their employer's pensions and collect monthly checks include:

Women. Employers hand out lump sums based on the average mortality for all men and women combined at each age. Since women generally outlive men, they'll typically receive more money over the long run if they stick with an employer's annuity, says Pat Purcell, an economist and pension specialist for the Congressional Research Service.

Any private-sector worker who has earned a pension less than the Pension Benefit Guaranty Corp.'s $3,801.14-a-month maximum for 65-year-old retirees. The federal insurer pays in full the vast majority of the pensions it is handed. But it saves money by capping the amount it will pay any individual.

So who should consider cashing out? Vested workers who:

Think their pension plan is seriously underfunded and won't recover. Unfortunately, that's not so easy to predict. It's not enough to look at your employer's financial statements. Many companies having difficulties nevertheless have well-funded pension plans. Generally, the only way to find out about a pension plan's funding status is for a member to formally request the information from the employer.

Plan on collecting their pension before age 65. The PBGC severely reduces the monthly payout to anyone who starts getting checks before age 65. If an employer provides any kind of early-retirement subsidy, and will pass that subsidy on to those who take lump sums, it can pay to cash out.

Have good reason to believe they may die much sooner than the mortality tables indicate. Lump sums are calculated by adding up all the payments that should be made to a person based on his or her expected life span, then calculating the present value of that stream of income. (The government publishes lifespan estimates here: Workers who are fairly certain they won't last the average life span might do better to cash out early. That way, they'd either have more to spend on themselves or have something extra to leave to their heirs. Of course, such retirees who end up staying healthy risk outliving their money.

Expect to receive significantly more than the $3,801.14-a-month PBGC cap on pension payments. Those employees would lose any payments above the cap if a plan failed.

But even workers in these categories should think twice about cashing out, says Bill Richenstein, professor of investments at Baylor University in Waco, Texas. If a pension plan goes kaput and the PBGC sends out reduced checks, workers may still get more than they would by cashing out and buying an annuity or investing the money. Financial advisers can take a big chunk of lump sums as commissions and fees, which reduce the monthly checks retirees can collect, he notes. Those who do take lump sums, he says, should protect themselves by investing in mutual funds or annuities from low-cost providers such as Vanguard or TIAA-CREF.