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A Lump Sum Buyout ("Pension Buyout" or just "Buyout") is a potentially large reduction in a company's Balance sheet pension Liability by offering the retirees eligible for pensions a one-time lump-sum cash payout equal to the amount they would have received through their existing Pension plans. Present value calculations are utilized to determine the full value of the retirees' annuity stream and thus construct the amount of the individual's lump sum. A Pension Buyout is an advantage for a company in some cases because it shifts the responsibility of managing those Pension funds from the company to the retiree. It is rare for a company to amend an existing pension plan. However, Ford Motor Company and General Motors Company both announced landmark-sized pension buyouts for their salaried (non-union) employees in the summer of 2012. Many variables (such as Age, Marital status, Health, Sex, Taxes, Inflation, Risk tolerance, Future expenses, etc.) are taken into consideration when a retiree eligible for the lump-sum is deciding to take it and terminate his or her existing annuity stream. In taking the lump sum payout, the retiree assumes all the associated risks involved in managing that money.

Landmark Deals
For years the pension liabilities of the top U.S Automakers had been rising. In December 2011, Ford and General Motors' pension liability had reached record levels. Detroit-based Ford and GM finished 2011 with a gross pension liability of nearly $74 billion and $134 billion respectively. On April 27, 2012, in order to slash this liability, Ford decided to offer voluntary lump sum buyouts to 98,000 salaried retirees. This move by the automaker is hoped to reinfore the company's credit rating and stock price, and effectively trim it's massive pension liability. General Motors followed suit on June 1, 2012 by offering a similar deal, offering a lump sum to 42,000 salaried U.S retirees.

Considerations
In general, comparing an annuity stream to a lump sum is an equation involving Present value. This calculation is based on the series of payments, the time period involved, and the Rate of return. The company provides the retiree with a lump sum that has been actuarially computed to equal the monthly stream at a rate of interest. There are several facets of a lump sum pension buyout to consider if someone is contemplating taking a lump sum.

Survivabliity
Most corporate retirement plans, in monthly form, pay the retiree and the spouse for life. The retiree and spouse together get a reduced annuity compared to just an individual retiree. The spouse would then get an even further reduced annuity upon their survival of the retiree. The annuity stops upon the death of the retiree, or in the case of a spouse's survival, the death of the spouse. With a lump sum, the lump sum generates retirement income for the retiree, the spouse, and heirs. So unlike a pension, there is the possibility of a leftover balance after their deaths.

Taxation
In taking a lump sum, there may be a portion of it attributable to contributions. These are after-tax employee contributions and may be dealt with in a variety of ways.

Distribution Flexibilty
The monthly pension provides a definite consistent payment for life (or joint lives). A lump sum provides two options. The retiree can take the payment, pay the taxes, and enjoy the complete investment flexibility that follows. Or, they can roll it over, tax-free, into an Individual retirement account. Once the amount is in the IRA however, it is subject to the applicable rules regarding withdrawals.

Tax Flexibility
Because of the distribution flexibility, with a lump sum, a retiree can achieve some degree of tax flexibility as well. The ability to take more or less from an IRA provides the opportunity to raise or lower taxable income. Financial advisory firms play an important role in this process, helping retirees make the most of their retirement money. ===Roth IRA Conversions === Retirees with a rollover IRA have the option of a Roth conversion. Roth IRAs provide:
 * Tax-free distributions
 * Not subject to minimum distribution rules
 * Upon death, a spouse may roll it over into their Roth, tax-free
 * If a Roth is left to a non-spouse beneficiary, they may take tax-free distributions over their life.

Investment Changes
Replacing the monthly annuity (pension) with a lump sum comes with several investment ramifications. It changes investment dynamics and alters the variability of cash flow. With a monthly annuity, cash flow is reliable. In other words, the variability of a monthly pension flow is extremely low, close to zero. The default risk of a monthly pension is also very low. the Pension Benefit Guaranty Corporation (PBCG) guarantees pension payments in the event of a plan termination. The company doling out the pension assumes the investment risk.

Fees
Retirees considering a lump sum should be aware that with counseling and advice comes fees from investment products. All decisions involving investing should also take into count the loads and fees associated.

Inflation
Future inflation plays a part in lump sum buyouts. If the inflation forecast is negative for the years following the buyout, retirees may opt to stick with the most purchasing-power-advantageous option.

Interest Rates
In 2012, the year of the announcements by Ford and GM, the interest rate environment is very low. If rates rise, the ability to shift into higher rate instruments is possible if enough flexibility is provided.

Estate Planning
The lump sum may change a retiree's current estate plan. An estate plan spells out the distribution of assets following a death. Everyone needs a Will and Power of Attorney for both health care and financial needs.

Risks
As with any investment decision, risk is involved.

Default Risk
Default risk is the probability that the company retirement plan will default on the annuity (pension). This risk however, is low.

Market Risk
Given that the annuity stream from the retirement plan is fixed, the market risk falls entirely upon the shoulders of the company. With taking a lump sum, market risk is shifted to the individual, an important facet of a pension buyout.

Mortality Risk
Not taking the lump sum carries with the mortality risk. This is defined as the possibility of the person (or inevitably the spouse) not living long enough to collect the equivalent value from the annuity stream.

Inflation Risk
This is the risk of purchasing power declining bur to future inflation. Having a fixed income stream offers no protection against this risk.

A Second Opinion
For some pension requirements, the lump sum will provide flexibility and survivability that can't be matched by a fixed annuity stream. For others, staying in the monthly pension provides a safe, determinable income stream that gives a low-risk retirement income flow, to be supplemented by other retirement instruments such as a 401(k). The decision is a complex one, and is unique to each individual. In any case, obtain a second opinion from a registered investment advisor.