If you are on the verge of retirement and fortunate enough to have a
pension, you may be faced with an important choice. Should you take the
regular, lifetime payments that your company plan offers or should you
select a lump-sum distribution option and invest the funds on your own,
perhaps rolling the proceeds into an Individual Retirement Account (IRA) or
investing in an annuity form not offered under your company plan that is
more tailored to your needs? Before you make an irrevocable decision about
your future, you should take time to understand what options are available
to you and what each choice might mean for you and your family.
If you are within a few years of retirement, doing groundwork now can help
you understand your options and allow you to plan for the retirement income
program that you feel is most appropriate for your situation before a
decision has to be made. Also, in the event that you are laid off, it¹s good
to have thought through this decision well in advance versus having to make
this important decision amid a barrage of choices that must be addressed
within a short time.
Your pension payment is an important part of your overall retirement plan.
Be sure to talk with your company human resources (HR) department (who
should have the most information on your company plan), your financial and
tax advisors about the following topics:
* Key Information About Your Pension (Optional Forms of Benefits)
* Pension Math and Factors to Consider
* Pension Maximization
* What Happens if Your Company Files for Bankruptcy and Your Company Plan Is
Taken Over by the Pension Benefit Guaranty Corporation (PBGC); Is Your
Company Plan Retirement Benefit Fully Covered by the PBGC Guarantees?
I address only the first topic and suggest that you use the information
provided here as a guide for your discussions.
KEY INFORMATION ABOUT YOUR PENSION
You and your advisors will need, at a minimum, an up-to-date Summary Plan
Description (SPD) and the most recent Individual Plan Benefit Statement
(from HR department). Some plan sponsors may send these documents (as well
as a copy of the actual plan document) to the plan participants
automatically. Otherwise, to receive a copy, you should ask your HR or
benefits department for copies. The plan sponsor is required by law to
provide you with these documents upon receiving a written request.
Your plan documents will spell out when your benefits become available and
what your monthly payment options are. For the most part, when you can begin
collecting pension benefits is determined by your plan and is described in
the Summary Plan Description. Most plans will not allow you to receive your
pension until you have separated from service. However, whether you have
separated from service or are still working, upon attaining "normal
retirement age" (usually age 65) you are eligible by law to begin receiving
benefits. Once you have separated from service, or turn 65 if still working,
you will be presented with your options. These may include a lump-sum
distribution, an immediate monthly benefit or a deferred monthly benefit
that usually starts at age 65 or the normal retirement age as defined by
your plan.
Single life option may be appropriate for retirees who want income for their
own needs and who don¹t have dependents or heirs that, in the owner¹s
judgment, will need or should be included in future cash flow from this
asset. It usually provides for the highest payout, since the payment is
calculated based solely on the life of the person collecting the pension
benefit (the "annuitant"). However, payments end upon death of the
annuitant, with nothing remaining for family members.
Joint and Survivor (J&S) Life Option is the "default" option for married
participants, is often selected by retiring employees who are concerned
about the financial welfare of their spouse who could become a widow or
widower. The monthly payout is calculated on combined life expectancies of
the owner and spouse, which may result in a smaller monthly payment versus
the Single Life Option. The advantage is that the payments are structured to
last over the life spans of two people and can be designed to avoid any
decline in cash flow following the death of a co-annuitant. However, it
generates a lower income than the Single Life Option because the calculation
is based on life expectancy of both husband and wife.
Period Certain is designed for those who want to guarantee a specific payout
for themselves and/or their heirs. Annuitant can exercise some control to
generate a certain income stream over a predefined length of time ("period
certain"). Heirs can inherit any balance, so the funds remaining in the
annuity aren¹t forfeited upon death of the annuitant. However, the defined
period usually ranges from 10 to 20 years, so annuitants who commence
receiving payments and then exceed their predetermined range would outlive
the cash flow payout.
You shouldn¹t make a decision in isolation about how to receive your pension
benefits. Preparing for retirement requires a comprehensive planning
process. Your financial advisor can estimate the cost of your retirement,
analyze your income sources and choose an appropriate investment strategy to
meet your goals and family situation.
* William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior
investment management consultant of Morgan Stanley Smith Barney LLC. He can
be reached at William.a.creekbaum@mssb.com or 689-8704.