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How to Weigh a Buyout Offer
If you are one of the approximately 30 million Americans who invest in a pension plan, it’s time to weigh what seems like a tough decision: a buyout.
While the hard truth is that your retirement could be much different than you expected, it’s likely best to get what you can from your investment instead of hoping that your plan will somehow beat the odds.
Buyouts reached their highest level ever during last year’s third quarter, up more than 22% from the same period the previous year. The total through the first nine months of 2019 reached nearly $17 billion. That’s a telltale sign that many pension plan managers and administrators have solvency concerns.
Here are some things to weigh if you’ve been offered a buyout – or suspect that you soon will:
- How much money is coming into the plan?
- What assumptions went into the plan?
- When will participants become recipients in your plan?
How Much Money Is Coming into the Plan?
Public pensions, for instance, rely on a strong tax base, which could be a problem if you live in an area that has experienced a population decline in recent years, like portions of the Midwest.
Similarly, because teacher pension programs depend, in part, on the number of working teachers, think about whether your state has shed those positions.
If you have a company pension (a rarity today), and your employer is not wildly profitable and growing fast, then a buyout is likely the best option.
What Assumptions Went Into the Plan?
Many of these plans came together at a time when interest rates were much higher, so assuming 7.5% annual growth wasn’t a stretch. Now, it is, thanks to bond and Treasury yields that are likely to remain muted for years to come.
Remember, too, that the last 11 years have been historically good for equities. The chances that this current run of good fortune in the stock market continues for much longer or repeats itself during your lifetime is infinitesimally small.
When Will Participants Become Recipients in Your Plan?
As of last year, the average life expectancy in the U.S. was creeping up on 79 years. Now, contrast that with the American tendency to retire between 61 and 66, and the fact that some pension plans, such as the Chicago Teachers Pension Fund, support retirement at 55 with full benefits. There is just no way to reconcile these demographics in a way that works out well for pension plan participants.
If these sound a bit like loaded questions, that’s because they are. But there’s a reason pension plans are increasingly an endangered species in America: The numbers don’t add up.
Some blame the financial crisis for killing pension plans. But baby boomer retirements and persistently low-interest rates by historical standards were always going to cause problems for pension plans.
To be sure, other breeds of mismanagement also were a factor. The most outsized examples involve investment managers that loaded up on bonds tied to subprime mortgages in the runup to the housing meltdown of 2007-08. Those “safe” bets ended up laying ruin to many corporate, municipal and, in Europe, many national plans.
The more than decade-long bull market has done virtually nothing to change the outlook. Sure, most pensions are doing better, but they are not doing well enough, with the national Pension Benefit Guaranty Corp., a government-backed bailout agency, saying it is struggling to keep underfunded plans afloat.
In this environment, what happens when stocks begin to tail off? That will happen eventually, and when it does, strained funds will start to buckle under the pressure even further.
A recession would have a similar impact. Even though the current data look good, the nation is long overdue for one. If that happens, not only will equities fall, but the Federal Reserve will likely cut rates to stimulate the economy – which will only further hamper the returns for fixed-income portions of pension investment books.
Add it all up, and it means counting on your pension plan to support you throughout your retirement is a risky proposition. So, whether or not you have a buyout offer, your approach to investing for retirement will have to change.
That means more financial planning, including adhering to a budget more closely, pursuing other retirement account options, like individual retirement accounts, and perhaps upsizing your exposure to the equity markets. It also could mean working a few extra years to stockpile savings.
For nearly everyone who had been counting on their pension to power them through retirement, much of this is either unwelcome news or another warning they didn’t want to hear. But it’s the reality, and the sooner you accept it, the easier it will be to shift gears and take the necessary steps to adapt.
