When it comes to retirement, the traditional pension slowly is becoming extinct. But for those who still have one, it’s a huge benefit and, typically, a key part of their retirement plans. There’s usually a number of decisions to make about how you take the pension. You often have the option to elect a lump sum payment or an income stream. If you take the income stream, you have numerous additional options to choose from: single life, 100% Joint and Survivor, 50% Joint and Survivor, 10-Year Certain, and on and on.
When making an election for your pension, we help clients make that election in the context of their overall plan. Here are some key things we consider with clients when helping them make these decisions:
- A lump sum rollover, if done to a rollover IRA, is not taxable until funds are subsequently taken out of the IRA.
- Do you have sufficient liquid assets to cover larger expenses? If you don’t have a reasonable pool of liquid investments that you could dip into for larger expenses like healthcare, vehicles, home maintenance, and travel, it could signal that a lump-sum rollover would be beneficial for you.
- Do you have goals of leaving assets to your heirs? If you want to leave something significant to your children or other heirs, remember that with most of the options except a period certain option, the income will end at your death or the death of your spouse.
- Do you prefer the security of the income stream over the risk of having a lump-sum invested in financial markets? Your appetite for risk, or lack thereof, can help inform which option is good for you. Many people connect their financial well-being to an income stream. If that gives you more comfort and meets your needs, the income stream maybe a better option.
- Is the company’s pension insured by the Pension Benefit Guaranty Corporation (PBGC)? If it is, then you likely would receive at least a portion of your pension even if the company fails. If they aren’t insured by the PBGC, then you should see if there are any other provisions protecting your pension. Just understand that you still are subject to some risk with the company.
- When are you retiring, and is there an inflation adjustment on your pension? Some pensions don’t offer an inflation adjustment on the income streams. If that’s the case, and you are taking early retirement, it’s important to remember that the income you receive today likely will not maintain it’s purchasing power through the remainder of your life. By taking the lumpsum and investing it, you may help your investable assets and income keep up with inflation.
These are just a few things to consider when making these decisions. All of them should be made in the context of your personal financial plan and your risk tolerance. Foster Group has experience helping individuals make these decisions. If you are trying to determine whether you can retire or how to take your pension, we can help.
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