6 Questions If You’re Within 5 Years of Retirement at ExxonMobil
Life is filled with big, consequential decisions: Where to go to college? Whom to marry? What job to take? Which house to buy?
Most of us manage to muddle our way through, living with the consequences of the decisions we’ve made, sometimes with regret, sometimes with satisfaction.
If it turns out the decision wasn’t a good one, we may be able to have a “do-over.” Divorce in the case of a lousy marriage; resignation and re-employment if a job isn’t right; sale and purchase for a faulty home choice. Less likely is re-enrolling in college, but even that’s possible if you’re up for multiple degrees.
When choosing how to take your ExxonMobil Pension Plan benefit, it’s a one-time big decision—lump sum, annuity, or a partial lump sum with a reduced annuity. ExxonMobil doesn’t give you a “do-over” if you change your mind years later. And with interest rates rising, for many near-retirees, it’s less and less certain that the lump sum is the right choice.
Making the wrong choice could mean living with regret for the rest of your life. So, how do you make the right decision for your situation? We’ve assembled a list of issues to consider. As you contemplate them, we’d suggest the following approach to decision-making:
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1
Evaluate your choices from diverse perspectives.
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There is a significant financial component to the decision, for sure. But consider the emotional aspect as well. How will it affect your heirs if you take the annuity? How well might you handle regret if you later conclude that you made the wrong decision? Talk to co-workers to get their perspectives on what the right decision is. Consider how your choice may facilitate or hinder your retirement plan.
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2
Think about both near-term as well as longer-term implications.
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- Living to 100 is a distinct possibility for many well-educated ExxonMobil employees who have enjoyed good healthcare and cared for themselves over the years. What may be attractive at 60 may be less appealing at 95 or 100. Project yourself to age 100 and try to envision how that decision at retirement is working out for you then.
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3
Consider how you’ll mitigate the downside risks of your eventual choice.
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My kids are tired of hearing me say, “Every decision has consequences,” but it’s true. Both the lump sum and the annuity have risks. Part of your decision-making process should consider how you might try to offset the risks. You’ll take the lump sum but be afraid of making the wrong investment decisions? Work with a trusted financial advisor. Take the annuity, but be concerned about inflation and purchasing power erosion over time? Invest your EMSP aggressively in an IRA. Taking the pension but worried about dying prematurely and not leaving anything to the kids? Consider life insurance or leaving other assets such as the house.
Over the previous three to five years, interest rates used to commute the annuity benefit into a lump sum have been at historically low levels, providing a solid financial incentive for taking the lump sum. (The higher the interest rate, the lower the lump sum, and vice-versa.) As rates now rise, the choice for many is not as clear. We think there’s no absolute wrong answer for all—as our points out, each alternative has advantages and disadvantages as our chart below points out:
Pension or Lump Sum?
| Issue | Pension | Lump Sum |
| Primary benefit? | Consistent monthly income independent of stock market returns | Retirement assets under your control |
| Major worry? | Inflation will decrease purchasing power | Poor investment returns |
| Source of benefit? | Company’s pension trust | Diversified investment portfolio |
| Inflation protection? | No growth in fixed monthly payment | Invested to increase more than inflation |
| Residual benefits? | Nothing left for heirs unless elect period certain option | Potential for growing assets to leave an inheritance for heirs |
| Permanence of decision? | One-time election | Can convert assets later into guaranteed annuity/annuities |
| Effect of dying prematurely? | Benefits cease after death of joint annuitant (if elected) | Assets can be left to heirs and/or as a charitable bequest |
| Ability to make “mid-course” corrections? | One-time election—no opportunity to change your mind | Can modify budget if assets are growing faster or slower than plan |
| How to compensate for concerns? | Invest other assets aggressively to preserve purchasing power | Maintain “rainy day fund” to avoid having to sell at bottom of market; diversify assets |
| Taxation of benefit? | Each pension payment taxed as ordinary income | Tax-qualified benefits can be rolled into an IRA and taxes delayed until distribution from the IRA |
We encourage near-retirees to assess their choice intentionally, cognizant of the pros and cons of each alternative and decide what’s best for them and their family. We also believe that discussing one’s situation with a trusted financial advisor whose fiduciary obligation is to put your interests first can be very helpful. Let’s talk!
Meet Doug Garrison
Doug is a Partner based in the Houston office and a member of the firm’s Wealth Management practice. He is responsible for delivering investment...Read more
Meet Doug
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