If you’re lucky enough to retire with a pension, you’ll have several choices on how to be paid. This is a one-time, irrevocable decision, and making it wisely will depend on a number of factors. Each plan’s payout options vary; some have over ten alternatives to choose from! The most common are:
- Single Life Payout – Usually provides the highest lifetime payment, but stops at the death of the owner. If you want payments to be continued to a spouse or beneficiary, it might not be the best option for you. Example: John selects the Single Life payout. While he is alive, he receives $2500/month. Upon his death, payments terminate.
- Joint and Survivor Payout – This choice provides lifetime income to the owner until death. Payments then continue to a survivor (usually a spouse) until he or she dies. Payment is lower than the Single Life Payout because it provides income for two lives. Survivor payment varies based on a percentage of the owner’s payment (i.e. 100%, 75% or 50%). Example: John selects a 75% Joint and Survivor payout. While John is alive, he receives $2000/month. Upon his death, his wife, Ann, receives $1500/month ($2000 x 75%=$1500). When Ann dies, benefits end.
- Term Certain Payout – This payout option guarantees a fixed payment for a fixed number of years. If the owner dies before the term is reached, the beneficiary continues to receive payments until the term is reached. Example: John selects a ten-year term certain payout and receive $3000/month. John dies one year later after receiving 12 payments. His beneficiary continues to receive $3000/month for nine more years (108 more payments). At the end of nine years, payments stop.
- Lump sum – Some pensions allow you to take a lump sum payment instead of a life or term certain payout. This option gives you more flexibility with your retirement funds. You should roll these funds into a traditional IRA so the distribution will not be taxable. If you like the concept of lifetime income, you can compare payouts from different insurance companies. Being able to shop around usually optimizes your monthly benefit. If you have no desire for income, you can invest the funds and pass them on to your beneficiaries.
Choosing a pension payout option is an extremely important matter, one that could negatively impact your heirs in the future. We can help you make an informed decision on the right choice for you and your family.