There was a time when company employees would receive a gold watch upon retirement, as well as a pension check each month for the rest of their lives. Pension payment options became more numerous and confusing over time, as pension funding and administration became more burdensome and complex. Many companies prefer to rid themselves of that responsibility and no longer offer pension plans; and other pension plans have gone bankrupt due to mismanagement. If you are one of the ‘lucky’ employees with a pension plan, you may be facing challenging decisions concerning your pension payment options, including the lump sum distribution. This is the company’s way of transferring responsibility to you, but this doesn’t mean it’s not worthy of consideration; more on that later.
The traditional pension payment begins at retirement and lasts for the duration of the employee’s life. A married person will likely also have the option to take the ‘straight life’ or ‘joint and survivor’ option. In the latter option the retirement actuary calculates how much should be withheld from the retired employee’s lifetime pension to fund the spouse’s (survivor’s) lifetime pension upon the retiree’s death. This can be accomplished in different ways and in many instances to the couple’s advantage. The responsibility for the traditional pension payment lies with the retiree’s former employer, public or private. As noted above, some pension plans have gone bankrupt due to mismanagement of funds or insufficient funding to support the number of retirees over their longer lifespans.
The lump sum pension payment option becomes more attractive for a retiree that has preferences outside income for the rest of their life, including:
- Do you want to provide for children or other, non-spouse heirs after your passing?
Most traditional pensions are for retired employees and their spouses. Unless you have the ability to select a ‘life with XX # of years certain’ payment option, income will go to heirs only upon your passing within that specified # of years after retiring. - Will your health prohibit you from living to average life expectancy?
The calculations for pensions are based upon the average life expectancy. You may not receive the full benefit of your pension if you do not anticipate living to that ‘average life expectancy.’ - Do you have sufficient income from other sources to fund your retirement?
If you have income from other sources, you may wish to continue to save during retirement and take the Lump Sum option. This allows you to distribute funds when you’re ready vs immediately upon your retirement.
If the answer to any of these questions is yes, then a lump sum distribution may be best.
When facing pension payment decisions, it is helpful to:
- Ask for help. Seek advice from your financial advisor at least six months prior to your retirement date. They can help you organize your estate/finances and review your options. What you don’t know about your options can hurt you.
- Schedule a meeting with a qualified fee-only financial advisor if you don’t have an advisor. Ask the planner about a discovery meeting that will help you uncover your financial desires and profile/personality. Most will provide this initial consultation at no charge. You can visit http://www.napfa.org to search for fee-only planners in your area. When meeting with the advisor take time to ask questions, clarify your priorities and personal preferences, and discuss your specific goals and objectives as you move toward retirement. Be sure that the financial advisor understands your needs, not just your list of assets. They can create a customized, long-term financial vision based on your specific circumstances and wishes.
