Choosing the “Best Fit” Pension Plan for You
Choosing the “Best Fit” Pension Plan for You
By: Stacey Nickens
American Express was the first company to offer pensions to their long-term employees. Beginning in 1875, employees who served the company for more than 20 years had access to half of their annual salary upon retirement.
While pensions expanded in popularity during the following century, pensions are becoming increasingly uncommon. Certain professions do still offer pensions, and if you are planning to begin taking your pension soon, you may be struggling to pick from the different options.
First, you need to decide if you will pick one of the monthly payment options or a lump sum payment. Start by considering the financial health of your company. Lump sum payments allow you to immediately cash out your pension, which could be of benefit if your company goes bankrupt down the line. Bankruptcy would end any monthly pension payments.
Those with faith in their company’s health should weigh the cumulative size of monthly benefits against the lump sum payment. A one-time payment may end up being smaller than the sum of all of your monthly payments. Not only could the cumulative benefit be larger, monthly payments would also give you a consistent income stream throughout your retirement.
You should also review the spousal benefits offered through your pension program. With some pensions, monthly payments end if the receiver dies shortly after beginning payments. The spouse would not have access to those monthly payments. Those with significant health problems or shorter familial life expectancies may consider a lump sum payment for the benefit of their spouse.
Certain benefit programs offer a hybrid option, in which you receive a partial lump-sum payment as well as reduced monthly payments. This selection could allow you to hedge against inflation. You could invest the lump-sum payment for growth while still having the security of guaranteed monthly payments. Keep in mind that you’re likely giving up some portion of your benefits in exchange for flexibility.
Finally, it’s important to remember the tax implications of a lump sum payment. If you do not rollover the payment, you will owe taxes on the distribution.
If you opt for monthly payments, you must select among the different options. Usually, the highest monthly payment option does not provide for survivor benefits. You receive the highest monthly payment as long as you are alive, and payments cease upon your death. This option may make sense if you’re single or if members of your family tend to have long life expectancies. You could also consider purchasing a life insurance policy that would provide for your spouse upon your death. Doing so would allow you to maximize your pension payments while also providing for your spouse in the event of your passing.
You could also take a reduced monthly benefit with survivor benefits. A slightly lower monthly benefit may come with limited survivor benefits, such as your spouse receiving benefits for only a set period of time. A significantly reduced monthly benefit may come with full survivor benefits, in which the surviving spouse receives monthly payments for their entire life.
When deciding between these different options, you can compare the costs of life insurance premium payments against the reduction in benefits required for spousal pension payments. You should also consider your spouse’s familial life expectancy to see if it’s likely they will outlive you. Answers to those two questions could help you make a prudent decision.
Do you need assistance in making the best decision? Reach out to set up a financial planning appointment today. We can review your different pension and life insurance options to help you pick the combination that will best serve you.
