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By Michael J. Wiener
Special to the Financial Independence Hub
Should you withdraw the Commuted Value of your Defined-Benefit Pension?
No. There are some exceptions, but the answer is almost always no. In fact, if a financial advisor is pushing you to pull out the commuted value of your pension, that’s a sign that you’re likely working with a bad advisor.
There is almost no chance that your advisor will choose investments that outperform a pension fund, mainly because the total fees you pay with an advisor are so much higher than the fees charged within a pension fund.
Some advisors will tell you that you won’t pay any fees because the mutual funds pay the advisor. Don’t believe this. Mutual funds and advisors get paid out of your savings.
Further, defined-benefit pensions have the advantage of handling longevity risk. Pension funds can afford to pay you based on your expected life span, and they’ll keep paying if you happen to live long. With an advisor managing your money, you need to hold back on your spending in case you live long.
Where it might make sense to take the commuted value
There are some cases where it makes sense to withdraw your pension’s commuted value. Here are a few:
1. Poor health makes you likely to die much younger than average. In this case, taking the commuted value allows you to spend more now or leave a larger legacy.
2. Your employer’s pension plan is badly underfunded and the company is in financial difficulty. A good example of this was Nortel. The Big Cajun Man was fortunate to get the full commuted value of his Nortel pension before pension payments were cut.
3. You leave an employer long before retirement age, and the pension plan rules make the commuted value more attractive than future pension payments. It’s important to make this determination based on modest return expectations for your portfolio. The fees you’ll pay an advisor severely dampen investment returns over long periods.
I’m sure it’s possible to come up with other narrow exceptions, but you should be very wary of advisors who push hard for you to withdraw the commuted value of a defined-benefit pension. These advisors have strong incentives to increase their assets under management to get more fees. Don’t be swayed by advisors who claim they can generate big investment returns.
Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007. He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on May 15, 2019 and is republished on the Hub with his permission.
