What to do with a corporate pension can be one of the biggest financial decisions people make when they retire. For advisers like Mark Atherton, it is also one of the trickiest because no two situations are alike.
Atherton is in Reston, Va., where more than half a dozen of his clients are executives or former executives of the aerospace and defense company Northrop Grumman Corp. That means over the years Atherton has become familiar with the ins and outs of Northrop's retirement benefits.
But the clients' lifestyles — and their employer's complex corporate history — mean each situation needs to be thought out separately.
"All their pensions look different," he said. (Northrop did not answer calls for comment.)
The situation highlights the complexity of the U.S. retirement landscape, but also one of the key areas where financial advisers can add value for clients. Studies show that left to their own devices, most retirees opt for up-front payments, although it is less clear how they invest or spend the money.
Atherton said some Northrop clients have money in no fewer than four different company-related vehicles: their deferred compensation plan; a supplemental retirement income plan for executives; a 401(k); and their pension. The pension itself is calculated on factors like earnings, years spent at the company and age at retirement, and is typically the most significant. It also poses the biggest question mark because retirees must choose a lump sum or an annuity.
Another wrinkle: Northrop's 2002 acquisition of conglomerate TRW Inc. means that workers who started their careers there expect slightly different benefits from those who began at Northrop.
When clients are ready to retire, Atherton runs simulations of several different scenarios with financial planning software, helping clients answer questions such as how much money they can expect to spend at a given age, or how market ups and downs might affect their goals. The software, developed by PIETech Inc. in Powhatan, Va., also spits out tax projections.
For employees who are younger with significant outside assets, Atherton said he usually recommends a cash-out. His reasoning: If clients can live off other income for five or 10 years, they can buy an annuity with the money that's more attractive down the road. That's because they will be in a more advantangeous spot on insurance companies' actuarial tables. But interest rates also play a role. Today's low rates tend to translate into skimpier benefits that investors could risk locking in for the rest of their lives. Atherton is willing to gamble rates will come up in the future.
The variables can lead to different outcomes.
One client who retired in 2008 wanted to continue to work elsewhere, making more than enough to live on. That made the lump sum, invested in an individual retirement account, an obvious choice. A monthly paycheck the client did not need would only lead to unnecessary tax bills, Atherton said.
For another client who retired several years before, the scenario was different. In addition to what he expected from Northrop, the client had a military pension that offered only annuity-style payments. He wanted to travel and realized that combining an annuity from the Northrop plan and one from the government with his Social Security benefits would cover his monthly budget. That was enough for him.
"Life goals drove the decision," Atherton said.
