As we continue strategizing ways to ensure you have income for life, the next plan of action, may or may not apply to you—manage your pension fund payments. With these types of old style retirement accounts becoming akin to the rotary phone, if you do actually partake in one, consider yourself lucky. The choices you make concerning how you take your money could considerably affect the income you receive from it.
Among the first choices when it comes to your pension, is whether to take a lump sum or receive the money as a lifetime payout. A lump sum may make sense when you have other resources, like life insurance or even a large investment portfolio. You will also want to be comfortable managing your money or have an advisor doing so for you. One advantage of doing that is the flexibility to pull from the money when you want. However, that can also be a downside if you don’t manage it well. It especially works well if your investments outpace inflation and increase faster than the rate of inflation and what you don’t spend can go to your heirs.
When you choose a lifetime payout, the chances of outliving your money go down because you’ll likely receive more money than you would from a lump sum. Think of it like a lottery payout. When someone hits the jackpot, they can take a lump sum, but it is a lower amount than the prize was. However, if they take the lifetime payouts, they get the entire jackpot.
If you choose the lifetime payout, you’ll want to consider how to structure your the payout. Obtaining the single-life payment will provide larger monthly payments, but your pension dies with you. By law, when married you cannot take this option without your spouse’s approval. If you choose the joint-and-survivor option, payments will be smaller, but they will last as long until both you and your partner have passed away.
The survivor benefit is based upon the pension owner’s benefit. Plans must provide a 50% option, meaning the survivor is paid 50% of the joint benefit. Additional options vary from 66% to 100% of their joint benefit. If you don’t opt for the 100% option, the benefit drops regardless of who dies first typically.
Generally, women should select the lifetime payout, because they often live longer than men. Thanks to gender-neutral calculations that pension plans utilize the choice between lump sum and lifetime payments can get even murkier. With women tending to outlive men, it is quite likely that they will receive a higher payout than they would in the open market. For instance, a 65-year-old man that wants to purchase an annuity which provides $60,000 annually for life would require roughly $914,000, based on Immediateannuities.com. In the case of a 65-year-old woman needs approximately $955,000 to end up with the same yearly income.
In regards to taking the lump sum, however, the gender-neutral calculations work against the females. With a longer life expectancy, the lump sum will not be as much. If you have a pension you need help making decisions with, contact me.
To see all the articles our Income for Life Retirement series, click here.