It can be easy to think of retirement as this distant place that embodies a space far in the future. But as we know, time, as a concept, only seems to move faster the older we get. With this in mind, it is important to think through your future retirement income and the channels that will contribute to it.
If you are committed to a benefits plan, most of your retirement income could be paid out from your pension. Not all pension payouts look alike; meaning, you will have many options presented to you. The challenge is, choosing the best payout option for your lifestyle and financial needs.
Benefits plans often come with many options for your retirement payout, which could include:
- Lump Sum Payout
- Single Life Annuity
- Period Certain Options
- Joint and Survivor Options
Each choice comes with both benefits and costs. Let’s take a more in-depth look at each of these to share ideas to help you determine which plan will be most satisfying for you and your family.
The Lump Sum Payout: All-You-Can-Eat
One of the lump sum options’ biggest benefits is the flexibility it provides. Gone are the days where you have to rely on the manager of the pension plan. You can now handle the money yourself. This option is especially attractive if you feel the investments are underperforming and you have a more lucrative investment strategy lined-up. With this option, you will also have access to your retirement funds in the event larger or unexpected payment needs arise.
We all know that sometimes too much of a good thing can turn into a bad one in the blink of an eye. The same predicament can befall the lump sum payout option. Having uninhibited access to your retirement fund can allow for the temptation to overspend. You don’t want to spend money simply because you can. Your spending should have a disciplined purpose. Another one of the main reasons people do not choose the lump sum plan is because there is no guarantee that the plan will last a lifetime. You take on the investment risk as opposed to the plan itself.
If the funds come directly to you, then the money you earn is taxable. However, if you elect for the funds to funnel into a traditional IRA, you will have more control over when you remove the funds and the income tax you will pay on them. It is important to note that at age 70 ½ you will have to begin taking required minimum distributions from your IRA.
The Single Life Annuity Payout: Dinner for One
Electing a single life annuity payout guarantees that you will have a monthly payout for the rest of your life. This plan often pays the highest monthly amount and will help establish a consistent monthly income for the rest of your life which will make retirement planning and budgeting more feasible. If you do not have a spouse or dependents who rely on you, this option is rather attractive as it ensures a steady flow of income each month.
This option may not be right for you if you have a spouse or partner. Since this option ceases payment once you pass away, your partner may be left without any source of income. Single life annuity payout may still work for you if you are married and you have additional streams of income sustaining your life in retirement.
Period Certain Options: Meal Prep
Similar to the single life annuity payout, period certain payouts will provide you a (slightly smaller) monthly check for a set amount of time. Most plans span from 10 – 20 years. A benefit of the period certain options is that it offers protection for your spouse or beneficiary for a limited time as well.
Unlike single life annuity payments that stop once you pass away, the period certain options will continue your monthly payments in full for the time that you have allotted. For example, if you choose a 15-year payment plan and you pass away after 7 years, your elected beneficiary will continue to receive the full monthly payments for the remaining 8 years of the plan. After the plan expires, so too does the payments.
Joint and Survivor Option: Two for The Price of One
This plan was designed for both you and your spouse and often comes with two options, the 50% or 100% plan. Each plan will provide you with a different monthly payout and paid expenses after you pass.
Joint and survivor options act similar to the single life annuity in the way that they are set up to pay you monthly for the rest of you and your spouse’s life. This option may not be able to act as the sole generator of income for the rest of both of your lives in retirement; therefore, creating an additional cushion is a good idea.
If you choose the 50% plan, your monthly payout is slightly lower and your spouse would receive 50% of that total payout for the rest of his/her life.
With the 100% plan, your monthly check is significantly lowered, but your spouse would receive the same full amount for the remainder of their life after you pass away.
Planning for Your Future: The Bill
Your pension plan is a wonderful tool, that if used appropriately, can be a huge asset for you and your spouse in retirement. You owe it to yourself and your family to think through the many options your pension plan presents and to choose the one that will provide the best financial support possible.
I would love to speak with you further about the options you have for your pension plan. Make an appointment, and we can talk about the ways to maximize your income in retirement.