Lots of baby boomers are hitting retirement age. And with retirement come some pretty big irrevocable decisions. One of which may be how to elect a pension. Not everyone has a pension. In fact, fewer and fewer people do as fewer and fewer companies offer them. But if you do have a pension and have yet to retire, you’ve got some important decisions coming. We can help.
- What is a pension? By definition, a pension is a defined benefit plan, as opposed to a defined contribution plan like a 401(k) or 403(b). In the simplest terms, a pension is pooled money set aside for the benefit of employees, managed by an institution, not you.
- How are benefits calculated? Your future benefits are typically based on certain criteria that consider your years or service or age or earnings history or any combination thereof.
- Lump Sum Payout vs. Life Annuity: Which benefit should I pick? One of the most important decisions, if offered, is determining whether or not you should take a lump sum buyout from a pension or instead take monthly installments.
- If you elect an annuity, this is usually a payment for life, which means you cannot outlive the benefit. On a negative note, these benefits are not typically inflated over time, and leave you with no access to a balance – your income is your income.
- If you elect the lump sum buyout, you will then be responsible for the management of the asset. On a positive note this means control over the investment choices, control over the withdrawals over time, both frequency and amount. On a negative note, you bore the investment risk and there is no guarantee you won’t outlive the money.
- Understanding Traditional Survivorship Options: Which one should I pick? If electing annuity, additional options to consider. The traditional picks are single-life annuity versus a reduced annuity payment with survivorship option.
- “Single-life” means you will receive a pension payment for the entirety of your and only your life. No survivor payment is made. As soon as you pass, whether in year 1 of pension payments or year 25, payments cease.
- “Joint payment with survivorship” means you take a reduced pension payment for yourself with a promise to pay for the entirety of both your life, and your survivor’s life. This typically is offered as either 100% survivorship of your benefit, or perhaps less, such as 75% or 50%. The higher the survivor benefit, the lower your pension payment while living.
- Understanding Other Survivorship Options. Some pensions allow you to take a payment reduction that can provide survivor benefits in other ways.
- “Period-certain” means that you receive a pension benefit that will also guarantee a survivor benefits IF you pass away within a certain time period. A 65-year old who elects a benefit with 15-year period certain would then be providing survivor benefits until age 80.
- A “pop-up” provision is usually attached to a survivorship option to protect the pension recipient by stipulating that if the survivor predeceases, than the pension benefit “pops-up” to a higher income, now that no survivor is listed.
Like all other parts of wealth management and financial planning, pension election is an art, not a science. Any time there are assumptions involved there can be no definitive right or wrong. What may be right for one may be wrong for another. So if forced to make a pension election decision, make a plan. Consider all the variables. Prioritize your needs and objectives. And feel free to call us.
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Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.