In a perfect world, when you retire, you would simply receive a pension payment. Obviously, that’s not the case. Mainly because each pension plan varies — which will impact when and how you’ll receive payments.
To clear things up a bit, here’s what you might expect to happen with your pension when leaving the workforce.
Federal Government Pensions.
The drawback here is that you don’t have a lump-sum option. In fact, there isn’t much wiggle room with federal government pensions.
“You have the option to take a deferred pension if you (retire) early, before 62 or full retirement age,” says Caine Crawford, a retirement advisor based in Denver who specializes in federal employees. “Otherwise, it’s cut in stone. All you can decide is when to retire.”
For those in the private sector, you have more options. It would be helpful to speak to the individual in charge of the plan. The plan administrator will let you know when and how you’re eligible for payments.
The plan administrator will also inform you if you can take a lump sum and roll your plan over into an IRA. “In the 401(k) world, you always have the option of rolling over into an IRA,” advises Christine Russell, a senior manager of retirement and annuities at TD Ameritrade. “In a pension, you may not have the option. You may be only able to get it out as a monthly benefit.”
Monthly Check or Lump Sum Payment.
“Typically, your options are you can take a lump-sum distribution, or you can take payments over your lifetime,” says Rich Ramassini, director of strategy and sales performance at PNC Investments. “You can take your payment over a joint-life period (both spouses), or you can take your payment for a defined period of time.”
As we’ve previously mentioned, a lump-sum will give immediate access to your benefits. You can then use this however you like. On the flip side, a monthly check will provide you with a recurring income for as long as you live.
Single Life Benefit or Survivor Benefit Option.
If you opted for the monthly check option, you’d next have to decide if you want to receive a single life benefit or a joint and survivor benefit.
With a single life benefit, you’ll have a higher monthly payment. The catch? When you pass away, the benefits stop — regardless of when you began receiving payments.
The joint and survivor benefit option allows your spouse to receive the lifetime benefit after your passing.
“You can, in many plans, buy a richer benefit for your spouse,” Russell says. “You might be able to use some of your pension benefits to give your spouse, instead of 50 percent, maybe 75 percent or 100 percent of what you get.
It will be in the summary plan report. You can see if it makes sense to get a richer benefit for your spouse.”
As federal employees, they can provide a surviving spouse either 25 percent or 50 percent of their pension.
You can also name children, parents, or next of kin as beneficiaries. Depending on the pension, how it’s distributed will differ. And, they must report the proceeds as income on their taxes.
Period of Time Required for Certain Options
Some pension plans allow participants to take a higher payout if they receive benefits for a defined period of time, usually 10, 15, or 20 years. If you pass away before the conclusion of the period, your spouse or heirs will continue to receive payments.
“Every option has advantages, disadvantages, and strings attached,” says Kristian Finfrock, founder and financial advisor with Retirement Income Strategies in Madison, Wisconsin. “Look at the impact of losing a spouse. We usually advise the 100% continuation option if they are married.”
“If the probability that you are going to live a long life is high (the annuity) could be the benefit that gives you the most income,” Ramassini says. “If your health is not great, and you won’t have a long life span, you may want the lump sum or joint life.”