Are You Approaching Retirement and Don't Know What Your Pension Income Options Are?
Company or government pensions, or defined benefit plans, are more and more becoming a thing of the past, but many people still have one in their retirement plan. When it comes time to retire, most of these pensions have several income options for you to choose from and it is an important decision that cannot be changed that affects how much you will be receiving for the rest of your life! Most people that have pensions are government employees, as only 17% of private companies have a defined benefit plan.
Some pension plans have a lump sum option where you can receive one lump sum of the full account value. This is usually only a good option if it is rolled over into an IRA of some sort. This may or may not be a good option for you, everyone's situation is different, as well as where the market currently is. In some cases, if you don't need all of the money right away, you could use the lump sum and build it into a laddered IRA annuity plan where you can start receiving an income as soon as you retire from a managed plan or an immediate annuity, but let some of the funds continue to grow for another 5 or 10 years or both. That way, all of the income isn't taxed today and you could receive a higher lifetime payout by increasing your monthly income over a period of time. A pension plan is nothing more than an annuity that was set up for you by the company since it also guarantees a lifetime income.
Other options besides taking a lump sum are usually set on a single life or joint lives. The single life option means that you will receive the maximum payout, but it is only good for your life. If something happens to you and you pass away, your spouse will not receive any further income. The joint life options sometimes have several payouts structures, at a reduced payout from single life. The basic joint life option will provide an income guaranteed for your life and your spouse's life at the same payout. Other options include either paying your spouse for a certain guaranteed period of time or at a certain reduced percentage. Almost all people take the joint option, so that their family will be taken care of.
THERE CAN BE A BETTER ALTERNATIVE:
If you are in average health or insurable, depending on your spousal situation and ages, it is almost always a better strategy to take the difference in the joint payout and the single payout, usually a few hundred dollars, and purchase a permanent life insurance policy with those funds. This has many advantages that most people would never think of. If the joint spouse is receiving a monthly income, it is fully taxable where the life insurance proceeds are tax free. For someone that is in their early 60's, this could easily be $100,000 - $150,000 tax free.
Another advantage to the life insurance is that a lot of new plans have built in benefit riders to accelerate the tax-free benefit to you as a monthly income should you become disabled with a chronic, critical or terminal illness. If you take the joint pension income, that set monthly amount can never be changed. If your spouse happens to pass away before you or shortly after you, the amount of the reduced payout would have been wasted, which can add up to tens of thousands and sometimes hundreds of thousands of dollars. With the insurance policy, the premiums could also build cash value within the policy, should the owner need access to immediate funds tax-free.
Life insurance has many advantages when it is used properly and the owner is educated properly on the product that best fits their needs. They can also be set up as a joint policy for both spouses and be a First-to-die policy, if they would like to protect both lives with the difference in the pension income amounts.
If this article fits your situation and you have further questions or would like help implementing a retirement income strategy, please visit our Contact Us page and send us a message.
For more information and education on how Defined Benefit Pension Plans work, see this video: