When the Retirement Dream Becomes Reality, You’ve Got Important Pension Decisions to Make

August 23, 2019
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Congratulations! Retirement day is here (or nearly here)! Further kudos if you’re among the lucky 20% of full-time, private workers who have a qualified employer-sponsored retirement plan in place.1

When the big day finally comes, you will be required to complete and submit paperwork detailing how you want your pension payouts to occur. It is important for you to know that the choice you will make is irrevocable; you are not allowed a do-over, a Mulligan, or a second chance to make that decision.

Knowing your options ahead of time and determining the right fit for you and your family is paramount to making what can be one of the most important decisions of your lifetime.

If you are vested in a defined benefit pension plan, you will receive a monthly benefit based on a pre-determined formula that typically takes your salary and years of service into account. In this type of “promise to pay” pension, you can choose one of three payout options:

  1. A single-life annuity. Under this first option, your company will pay you a defined amount on a monthly basis for as long as you’re alive. However, once you pass on, the payments stop.
  2. A qualified joint and survivor annuity. Consider this option if your desire is to take care of your spouse after you’re gone. You will receive a lesser monthly payment, but your spouse will continue to receive a monthly check equal to at least 50% of your benefit after you pass on and until your spouse also passes. If you are the sole breadwinner in the family and/or your spouse is considerably younger than you, this may be a more appealing option.
  3. A lump-sum payment (if offered). This third option provides a one-time payout for you to spend or invest as you see fit.

Which option to choose can be confusing, and there is no “right” or “wrong” choice; rather, the decision should be based on your unique situation. Factors to consider include:

  • Your health
  • Marital status and whether or not you have children
  • The desire to use your pension to provide a legacy
  • Whether you have a life insurance policy that will provide for your spouse/family

While selecting the right payment option is the most crucial decision, there are some additional important considerations, such as:

When to begin receiving your benefits. Are you financially secure enough to delay the payouts for a year or more? Do you have financial obligations that require you to begin taking the benefits immediately? If so, what percentage of your monthly payout is needed to cover them? Finally, how will this decision affect the withdrawal rates and/or allocations of assets?

The health of your company. The pension’s “promise to pay” is only as good as the company making the promise. Should your company go out of business or declare bankruptcy, the Pension Benefit Guarantee Corporation (PBGC), a U.S. agency, will become responsible for your pension benefits. However, you may not receive 100% of your monthly payouts once the agency completes an evaluation of the pension plan – a process that can take two to three years. Although, in the interim, you will continue to receive your normal monthly benefit.

If your company has been faltering in the current economy or you have serious concerns about its future, you may want to consider a lump-sum payout to invest on your own.

Whether your pension offers a “pop-up” provision. If you plan to choose a qualified joint and survivor annuity to ensure spousal benefits, what happens if your spouse predeceases you? Plans with a pop-up provision will increase your monthly payment to what you would receive under the single-life annuity option if your spouse passes first.

As an advisor, my job is to make sure that my clients address all of these considerations when it comes time to make this important decision, as you may only have one shot to get it right. An experienced financial planner – someone who has guided dozens of clients through this process – can help to ensure that you choose the best option for your specific situation.

1. Congressional Research Service. Worker Participation in Employer-Sponsored Pensions: A Fact Sheet. https://fas.org/sgp/crs/misc/R43439.pdf. Accessed July 16, 2019