When you think of retirement, you probably envision the enjoyable ways you will spend your free time. But, you may also want to give some thought to receiving your funds while in retirement. If you participate in a company pension plan, you will have to decide how you want to receive your pension proceeds. Consider your payout options, so when the time comes, you can make the choice that is most appropriate for you.
Typically, most pension plans offer the following:
- Income for the rest of your life (single life option)
- Income for the lives of both you and your spouse (joint and survivorship option)
- A lump-sum distribution.
Both single life and joint and survivorship options provide you with a fixed income (usually in monthly installments) in exchange for your pension balance. The third option (lump sum) allows you to take your entire pension balance and manage it yourself.
If you are concerned about outliving your assets, regardless of your marital status, take one of the two “income” options, which may ease your fear of running out of money. If you are single, the choice is easy because you can only select the single life option. On the other hand, if you are married, you can choose either income option.
The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, payments continue until the death of both you and your spouse. If you have other substantial retirement assets or your spouse has his or her own pension, taking the larger income offered by the single life option may be your best bet. By contrast, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option may be more appropriate.
As you carefully review these two income options, keep in mind that there may actually be a “third” income option, which is really a combination of the single life option and life insurance. By taking the higher income with the single life option and using some of that income to pay the premiums on a life insurance policy, you may be able to “net” more income than with the joint and survivorship option. Meanwhile, your spouse will be protected with a potentially significant life insurance death benefit. After your death, the death benefit proceeds will be received income tax free by your spouse and can be used to help fund his or her retirement.
The success of this strategy, often called “pension maximization,” depends on your age, health, the type of insurance policy, and schedule of premium payments. The issuance of a life insurance policy is subject to underwriting approval, and the issuance of a policy at a reasonable premium is not guaranteed. Therefore, it is important to apply and verify that you qualify for an appropriate amount of life insurance before making a pension payout election. If the premium consumes too much of your monthly benefit amount, this strategy may not be an appropriate choice for you. In addition, guarantees of a life insurance policy are based upon the claims-paying ability of the insurer.
It is important to realize that selecting either income option requires you to give up your pension balance in exchange for income. Therefore, you cannot choose a payout option at one point, and then later decide that you would like to receive your remaining pension balance in a lump sum. Let’s look at the final payout option, the lump-sum distribution, below.
If you want full control over your pension assets during retirement, or if you are concerned that your pension income may not keep pace with the cost of living, then a lump-sum distribution could be the better option. You can take a lump-sum distribution in one of two ways. You can either roll it over into your own Individual Retirement Account (IRA) or receive the pension proceeds (minus income taxes).
Unless you plan on using your pension assets for something other than retirement, it is probably not a good idea to receive your lump sum minus income taxes. The IRA rollover may be a more suitable choice because you will continue to receive the benefits of tax-deferred accumulation and only be taxed on withdrawals from the IRA.
While planning for possibly several decades in retirement, you will need to make a decision about your pension payout. Consider your options carefully to determine which method will help you establish your future financial needs and lifestyle. Be sure to examine your situation with the assistance of a financial professional before deciding on a strategy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any life insurance product or individual security. To determine which insurance product(s) or investment(s) may be appropriate for you, consult your financial professional prior to investing.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This article was prepared by Liberty Publishing, Inc.
LPL Tracking #1-05255318