Should someone accept a pension buyout?

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Should someone accept a pension buyout?

My sister worked for a business for 5 years. It has been over 10 years since she

left. She just received paperwork offering to pay her a lump sum of $12,000 instead of $300 per month starting at age 65. She is single with no children. This is very tempting to her because she is low income and has several medical issues. In her mind, she believes that she will not survive to be 65. She asked my opinion and my immediately response was that I have reservations about accepting this offer.

Asked on September 28, 2016 under Employment Labor Law, New Mexico

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

This is purely an economic question, not a legal one. $300 per month is $3,600 per year, so the break even for her would be (ignoring for simplicity the effects of inflation and the time value of money) three-and-third years, or 40 months. Right now, average female life expctancy is around 78 years, so if she were to live anything like that, she'd come out substantially behind with the buyout (which is why it's offered to her; the company expects ot save money by buying her out): if she were to live to 78, she'd receive around $46,000 in pension benefits. Statistically, it's a bad bet--even if she only lives to 70, she'd come out behind with the buyout by around $6,000. So on statistics, she should not take it, and she should consider that the company is only offering it to her because they believe that the buyout is less than she'd get through the normal payments.


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