Date: 23-Jul-2020
Think of this. . .when you retire, you’ll have to make an incredibly important decision—one that will affect the rest of your life. If you’re part of your company’s pension plan, you’ll have to choose how you want to receive your pension proceeds. While the options you’ll be given are fairly straightforward, the decision you make will be permanent—once you make it, there’s no turning back. Take a moment now to carefully examine each option and how it relates to your retirement needs and goals so you can make an informed decision.
Typically, most pension plans give retirees the following choices:
At first glance, you might think that your marital status will dictate which option is best for you. But, there’s a lot more to it than that. Let’s take a closer look at the options. The first two (single life and joint and survivorship) provide you with a fixed income (usually, in monthly installments) in exchange for your pension balance. While the third option (lump sum) allows you to take your entire pension balance so you can manage it yourself.
If you are worried about outliving your assets, regardless of your marital status, you should take one of the two “income” options. It’s a simple way to ease your fears about running out of money. If you’re single, this choice is easy because you can only select the single life option. However, if you’re married, it’s a different story altogether because you can choose either income option.
The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, but payments continue until the death of both you and your spouse. If you have other substantial retirement assets, or your spouse has his or her own pension, taking the larger income offered by the single life option is your best bet. On the other hand, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option is the way to go.
As previously mentioned, both of these payout options require that you give up your pension balance in exchange for income. In other words, you can’t just select a payout option one day and then decide at a later date that you’d like to receive your remaining pension balance in a lump sum. With this in mind, let’s turn our attention to the final payout option—the lump sum distribution.
If you want full control over your pension assets during retirement, or are concerned that your pension income may not keep pace with the cost of living, then a lump sum distribution is the thing for you. You can take a lump sum distribution in one of two ways. You can either roll it over into your own IRA (Individual Retirement Arrangement) or you can receive the pension proceeds net of income taxes. Unless you plan on using your pension assets for something other than retirement, don’t even think about receiving your lump sum net of income taxes. The IRA rollover makes the most sense because you’ll continue to receive the benefits of tax-deferred accumulation and only be taxed when you take withdrawals from the IRA.
As you can see, you’ll need to make some important pension decisions as you approach retirement. This will involve taking a serious look at each option to determine your best course of action. Remember, being proactive in your planning today will act as a good first step in eliminating “pension tension” when retirement day draws near.
© 2018 Liberty Publishing, Inc. All rights reserved. Distributed by Financial Media Exchange
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