Pension worries are unnecessary

Q: I am 67 years old. I will be retiring in three months after working at the same company for more than 40 years. I have the option of taking my pension as a lump-sum payment or annual payments for life. I prefer the annual payments, but there is this nagging concern about what happens if my retirement plan is terminated for whatever reason.

I know that the Pension Benefit Guaranty Corp. was created to pick up the payments if that happens, but I have been getting conflicting information about the reliability of PBGC. A CPA and a retirement adviser warned me that PBGC pays only pennies on the dollar.

I called the PBGC customer-contact center and had no success in trying to confirm or deny the reports I had heard. There probably are some variables that I'm not aware of, but can you give me an accurate picture about how well PBGC covers these claims?

A: Sometimes it's good to go straight to the horse's mouth — I suggest a visit to the PBGC Web site, www.pbgc.gov. There you will find that 80 percent of all pensions are paid out exactly as they were expected by the formula of the corporate pension. This assumes that you retire at retirement age, when the pension is taken over.

The uncertainty over benefits has two main sources. The first is benefit accrual. Pension-benefit accruals stop when the pension goes to the PBGC. As a result, you won't receive the pension you might have expected, if it had continued to accrue benefits until you retired from the company.

The second is that there is a maximum amount of pension covered by the insurance. A pension up to $54,000 a year for a 65-year-old worker is fully covered. The coverage maximum drops to $42,660 for a 62-year-old and to $24,300 for a 55-year-old.

The important thing to understand here is that the PBGC doesn't "cut" pensions. You would experience much the same thing if you left a job with a pension and elected to take the pension in monthly payments when you departed — your payout would be less than you would get if you stayed and took the pension after more years of service and at an older age.

Q: We have just been to a "wine tasting" — and learned about life settlements. This investment sounds too good to be true — a 120 percent return for a three-year investment. Should I turn my IRA over to this? What am I missing?

A: Yes, 120 percent over three years is "too good to be true." The return you get from a life settlement depends entirely on how long the insured lives, and no one knows that in advance. Worse, small differences in survival time will cause enormous shifts in your effective return.

It's also important to realize that this is a "Wild West" market. Both regulation and liquidity are limited, and the market-makers (the middlemen) get paid today. You, however, must wait for someone to die in a timely manner.

Questions: scott@scottburns.com