General Motors assembly workers Monique Watson and Evetta Osborne install an electric battery on the underside of a 2011 Chevrolet Volt electric vehicle at the Detroit-Hamtramck Assembly plant in Hamtramck, Michigan
General Motors assembly workers Monique Watson and Evetta Osborne install an electric battery on the underside of a 2011 Chevrolet Volt electric vehicle at the Detroit-Hamtramck Assembly plant in Hamtramck, Michigan Reuters

Last week thousands of retirees were suddenly faced with the largest financial decision of their lives, when both Ford Motor Company (NYSE: F) and General Motors Company (NYSE: GM) announced they would launch immense pension buyout plans unprecedented in the United States.

The scale of the pension buyouts is unprecedented: No American company of GM's or Ford's size has ever launched such a program, according to Dean Thurman, senior partner and co-founder of InvestWise Financial in Bloomfield Hills, Mich., who advises retirees from the automotive industry on pension matters.

Many retirees faced with the prospect of a pension buyout can be pretty intimidated, according to Thurman, who has spent almost 20 years working with blue- and white-collar employees at GM, Ford and Chrysler.

Ford, the nation's second-largest car company, will be offering its buyout to 98,000 retirees and former employees as it seeks to reduce its $74 billion pension obligation. GM is seeking to cut back its pension obligation by $26 billion through offering buyouts to 42,000 employees and shifting others to a third-party pension company.

Under the pension buyouts, retirees will be offered the choice of remaining on the companies' pension programs or taking a lump-sum pension payment offer. For a white-collar employee, age 65 with a $3,500-a-month pension, a lump-sum buyout can easily be as much as $500,000, according to Thurman.

Without a doubt it is the most important financial decision they will make in their life, Thurman said. The decision about whether or not to take a pension buyout can be a difficult one requiring weighing the pros and cons of staying with the company or going it alone with one's own investment plans.

If you take the lump sum at age 65 and you overspend or invest it badly, you run out of money, Thurman said, illustrating the worst-scenario outcome of taking a pension buyout. However, for many, the lump-sum payment may actually be the better decision.

There are several factors to consider when making the decision: whether the amount offered is fair (it usually is), the long-term health of the company, and whether a retiree plans to leave any money to their children. Thurman recommends that anyone considering a pension buyout should consult with a CPA and financial advisor before making any decisions.

The first step in considering a pension buyout is evaluating the fairness of the offer. Because U.S. interest rates are exceptionally low right now, the base amount of the offer should be big to compensate for it. The calculations used by companies when designing buyouts are highly regulated, and so the fairness of the offer is not usually a stumbling-block for most retirees. If the lump-sum is wisely invested it can be equally if not more valuable than the original pension plan.

The second factor to evaluate when considering a pension buyout is the long-term health of the company. If the outlook for the company does not seem positive, it may be wiser to take a buyout. If a company goes bankrupt, your pension can be at risk. In the case of GM, it has entered and exited bankruptcy in the past 10 years, something which 20 years ago few would have predicted.

Six or seven years ago, neither you nor I could have imagined GM or Chrysler going out of business ... Maybe GM is healthy now, but who knows in five, 10, 25 years, Thurman said.

For its part, Ford has a global pension obligation of $74 billion and a market capitalization (the total value of its outstanding shares) of just $40 billion. Last year the Dearborn, Mich.-based company's pension plan was underfunded by $15.4 billion, although that amount fluctuates with interest rates, according to Reuters.

Still, though, the likelihood of GM or Ford going bust is not substantial at this time, and the primary factor for most when considering a pension buyout is whether they will have any money left for their children or grandchildren. Ford calculates its pension obligation, and buyouts, using a unisex life-expectancy of 82, according to Thurman. GM probably uses something similar, although all the details on its buyout are still developing.

What the life-expectancy of 82 means for retirees is that if they retire at age 65 and then die at age 78, for instance, they miss out on collecting four-years' worth of the calculated value of their pension. Essentially, the company will get to collect on the pension and pocket the savings without anything being available for retirees to give to their children. With a lump-sum payment, though, if it is properly managed, a retiree who dies at age 78 will have money left to will. Of course, the opposite is true too: someone who kept their pension and lived to be 92 would continue to collect it every month while someone who took a buyout would miss out on those years (although their investments could still pay off for that time).

The key for anyone taking a pension buyout is to invest it directly in an IRA to avoid taxes. A primary reason many retirees avoid taking buyouts, according to Thurman, is that they think the government will claim a third of the value in taxes. With an IRA this probably won't happen (although, again, people should always consult a CPA or financial advisor before going down this path).

Former GM workers affected by the pension buyout will have until July 20 to decide, according to Thurman, while Ford's program will begin in August.

If you take a buyout, the most important thing to do is invest it in an IRA that is safe, liquid and at bare-minimum keeps up with inflation, according to Thurman. While it is not an easy decision by any definition, a pension buyout from Ford or GM can actually be a good thing for many people, and retirees should not be scared by the prospect before doing a little research and consulting about the possible benefits.

Ford Motor Company (NYSE: F) shares were down 12 cents to $9.99 in midday trading Monday. General Motors Company (NYSE: GM) shares were down 5.22 percent to $20.86.