“If you're fortunate enough to be among the 29% of Americans with a company-funded pension, you probably have to make a one-time, irrevocable decision on how you want to receive your benefits.” – from Fidelity Viewpoints 6/19/2013
A common question we are asked from those finally reaching retirement is which payout option do I choose? The options usually include lump sum payout, lifetime income or term certain. A lump sum payout is fairly easy to understand … you are paid a lump sum and sent out the door. But now what do you do with it? If you don’t move it to an IRA, be prepared for a huge tax consequence. If you move it to an IRA, how will you invest it?
A lifetime income (or single life pension) is also fairly straightforward. You are entitled to a pre-determined amount of money for the rest of your life. However, there are more questions to consider. Does the amount increase with inflation? What if I get hit by a bus tomorrow … does my money go to my heirs? What if I need a large sum of money down the road?
The last option often called term certain (or joint and survivor pension) allows for monthly cash income for you and your spouse. This solves the question of how will my spouse survive, but pension plans providing for two lives will cause the amount you receive to be significantly decreased. Will the income be enough to meet your needs?
So it’s good to take these options seriously. Having a plan goes a long ways. How much do you spend now? Do you have any debt? Are you planning to spend more or less in retirement? Are you in good health? Do you have longevity in your family history? What are your goals (spend my whole retirement), objectives (help pay for grandkids education), and risk tolerance (protect my principal)? Where do you want to live, and what is the cost of living there?
Besides evaluating your needs, consider the nature of the pension plan. Does it offer an annual COLA (Cost-of-Living Adjustment)? How does the plan handle survivorship needs? If you have a federal pension, will you be able to collect Social Security/Medicare?
If all this sounds overwhelming to you, you aren’t alone. Sommers Financial can help; or find an advisor that you like and trust, someone who is knowledgeable and responsive. There is not going be a perfect answer because we don’t have the crystal ball to know how long you will live or what a gallon of milk will cost 10 years from now. Warren Buffet says, “It is better to be approximately right than precisely wrong.”