If you have a pension, consider yourself one of the lucky ones. Many companies have opted to do away with pensions in favor of employee funded 401k plans. This takes the risk away from the company and places it squarely on the shoulders of the employee.
But if you do have a pension and are getting ready to retire, then you will need to determine which pension option is best.
TYPICAL PENSION OPTIONS
In general, your choices are:
- Single Life Payout – this simply means that you receive a monthly income for life. Once you die, the income stops.
- Joint Life Payout – this simply means that you receive a monthly income for life. Once you die, your spouse will continue to receive a monthly income for his/her life.
- Lump Sum Payout – this simply means that you receive a lump sum instead of a monthly income.
LUMP SUM VS. MONTHLY INCOME
Following are 4 REASONS WHY YOU MAY NOT WANT TO CHOOSE THE MONTHLY INCOME OPTION:
- Heirs Receiving Nothing: Upon your and your spouse’s death, your heirs would receive nothing. Taking the lump sum option, on the other hand, would allow you to roll it over to an IRA so that you could maintain control of your principal and have an asset that could be passed on to heirs.
- Some Pensions Are Underfunded: This means that there aren’t enough assets in the pension plan to pay out the benefits to all entitled people (i.e. you may not receive what you anticipated or were promised). This could be due to the pension manager investing too aggressively or inappropriately. With the lump sum option, you maintain control and can decide how aggressive you wish to invest.
- Loss of Control: The pension company controls your money. In addition to investing too aggressively or inappropriately, some pension plans have even experienced fraud whereby the assets were stolen. Once again, the lump sum option lets YOU control the money.
- Usually No COLA: Many corporate pension plans do not provide an annual cost of living adjustment. If you needed more than the monthly amount, then you would be out of luck. Not so with the lump sum option; you could always take more if you needed it.
There are obviously times when choosing a monthly income over the lump sum would be preferable. However, choosing a lump sum provides you with control, an asset that can be passed on to heirs, and a cost of living adjustment.
These are tremendous benefits that should not be overlooked. However, it’s important to look at all the moving parts and have all the facts so that you can make an informed decision that is appropriate for YOU.
CERTIFIED FINANCIAL PLANNER™
SINGLE LIFE OPTION VS. JOINT LIFE OPTION
If you feel that a monthly pension income is right for you, then you must choose from a number of options. The two most common are single life and joint life.
The single life option is usually the one that provides you with the most monthly income. But, keep in mind, that once you die, the income stops. YOUR SPOUSE AND HEIRS WOULD RECEIVE NOTHING!!! This means that if you die after only receiving one pension check, your family would not receive a dime, even though you may have worked for years. This reason alone is why we almost never recommend the single life option; although, there are exceptions.
The joint life option typically provides a monthly income that is not much less than the single life option. You receive a slightly smaller monthly income in exchange for the peace of mind of knowing that your spouse would receive a benefit for life if you die.
This trade off is many times worth it.
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Photo credit: Lending Memo
1 thought on “Which Pension Option Is Best ?”
Another negative which happened in my own family was that the company merged with another company and even after lawsuits, the monthly pension amount went lower than promised at retirement. Knowing this now, given the option of a lump sum is much more appealing and something I wish my family member had done to preserve retirement funds.