Whether retirement is quickly approaching or it feels like it’s light years away, it’s never too early to think about what’s going to happen when you leave your job for the last time. Though traditional defined benefit plans are less common today, they exist in many industries and important decisions must be made. Before you hit the golf course or move somewhere warm, you have to consider how you would like to receive your pension. Would you like it all in one large lump sum? Monthly payments? What about an annuity? Is there a spouse that you need to consider? All of these are questions that you need to ask yourself.
First, know your options. If you’re in a company pension plan, you may be able to leave the money in the plan, roll over into an IRA, take monthly payments or make other choices. A lump sum is self-explanatory, but there are several options with those monthly checks. Most commonly there are going to be three options for an annuity. A single-life annuity would yield the highest monthly payout, but is only available during your life time. A joint-survivor annuity will pay a lesser monthly amount, but guarantees some sort of payment until you and your chosen beneficiary are both deceased. Finally, there is a period-certain-and-life annuity, which would be larger than what you would receive with a joint-survivor annuity, but only guarantees payment to your beneficiary for a specified number of years.
Identify Your Goals for Your Pension
According to Alan Glickstein, a senior retirement consultant with Towers Watson, “What it really comes down to is figuring out what you want to accomplish with the money.” If you can choose between a lump sum and an annuity, don’t just focus on what will give you the most money over time. Instead, focus on what will be best for your individual circumstances. How will you pay the bills when you retire? How will your spouse manage? If you take the lump sum, will you invest it properly? You can estimate how much money you’ll get from Social Security here, and additionally, you can use the Insurance, Investment or Retirement section of the Financial Tools on our website.
Weigh Your Pros and Cons
Consider each option available to you carefully. Each option will have its advantages and disadvantages. For instance, with a lump sum, you have the opportunity to invest it and allow it to continue to grow, but it comes with the burden of you having to manage your money on your own and, if you’re not careful, can incur investment fees that can easily pile up and deplete your money. On the other hand, with an annuity, you gain longevity insurance, this check will come each month until you, or your beneficiary, dies. The drawback however is that your monthly payout will gradually lose purchasing power over the years, due to the fact that most pensions are not adjusted for inflation.
Please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.