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Should you take ‘LSD’?

By Jennie L. Phipps · Bankrate.com
Sunday, May 13, 2012
Posted: 6 am ET

I live in the Detroit area. Many of my neighbors are or were Ford employees. The buzz is about Ford’s latest retiree lump-sum distribution, or LSD, offer.

Leon LaBrecque, an attorney and CEO of LJPR LLC, a company that is contracted with Ford to provide retirement planning advice, spends his days explaining to Ford retirees what they should consider when they are presented with their offers.

LaBrecque calculates that the average Ford unionized retiree who took a package in his 50s after 30 years with the company will be offered somewhere in the neighborhood of a $780,000 lump-sum buyout. The former employee now living in retirement is also free to decide to keep his Ford pension, which amounts to about 4.25 percent of that lump annually -- somewhere in the neighborhood of $33,000 a year for his life and a portion of it for the life of his spouse.

LaBrecque says he will recommend to about 20 percent of the people who are eligible that they take the lump. Often, those are people who are in poor health, whose life span is clearly limited, who have a desire to pass their money on to their children.

He urges the other 80 percent to hang on to their monthly pensions, pointing out that the 4.25 percent pension from Ford is much better -- after you take into account fees, taxes and other costs -- than using part of the money to buy a private annuity while investing the rest. That's a strategy many financial advisers are urging retirees to consider, but LaBrecque scoffs: "Fees matter. Every retiree is inundated with people trying to get them to swap the 4.25 percent pension they've got for a 3.1 percent annuity. Why would you do that?" he asks rhetorically.

Despite what LaBrecque says, for some retirees, the prospect of putting that much money in the bank is hard to pass up. When he talks to retirees, LaBrecque calls the offer a drug -- lump-sum distribution -- LSD. "Do you really want to take LSD?" he asks. "Do you really want to take the risk?"

Does it matter to Ford? Yes and no. The government doesn't allow Ford to consider a retiree's sex or health in calculating a lump sum. So to Ford, all 63-year-old retirees, for instance, are exactly the same in the amount of time they will live.

When someone who is getting the monthly pension dies young, the pension plan gains because the liability for the pension went away, and the money stays in the plan to be distributed among other recipients, thereby reducing Ford's liability.

"This is called an actuarial gain," LaBrecque explains. "If a retiree takes the lump-sum payment, Ford has removed the liability, but it has also eliminated the possibility of any actuarial gain."

If only the sickest pensioners take the lump sum, which is what LaBrecque is suggesting they do, then there is no actuarial gain for Ford, and there could be a loss. But it probably won't work out that way because of the undeniable appeal of LSD.

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