Updated: Oct 23, 2018
As more companies suspend and eliminate their pension plan, employees are faced with the decision of what to do with it. For those fortunate enough to still have a pension (whether it is a defined benefit or cash balance plan) upon retiring or separating of service from the company, the same decision looms. Unfortunately, most of the time the employee receives a letter with a lot of information on what their options are, but very little guidance on what is best for their personal situation.
Not all pensions allow a lump sum option. A prime example that comes to mind are teachers. The only option for most teachers is to take the monthly annuity benefit.
Here are some things to consider when deciding what to do with your pension:
1. What is the financial strength of your company?
All pensions are guaranteed by the PBGC (Pension Benefit Guarantee Corporation) but only up to annual limits. For a 65-year-old, the limit for 2018 is $65,045. Anything above that amount and you are out of luck if your company’s pension plan fails (we typically see this with companies that go bankrupt – GM anyone?). Your decision may be straightforward if you have a balance significantly higher than the limits and are concerned about the financial strength of your employer.
2. How healthy do you feel?
Do you or your family have a history of illness? If you are concerned about not living long into retirement, what is the point of having lifetime income that doesn’t last very long. Remember, when you pass away the pension stops paying a benefit unless you have chosen the spousal option. It may make more sense to rollover your benefit into an IRA you control and can leave to the beneficiaries of your choosing.
3. Do you want to leave a legacy?
Typically, if electing a spousal benefit, the benefit is reduced to 50% of your benefit when you pass and leave a spouse behind. But what if your spouse dies before you? At your passing the monthly income stops altogether. Any money left over goes back to your company and your beneficiaries receive nothing. By opting to rollover your pension to an IRA, you at least have the option to leave any remainder to your heirs.
4. Lump sum vs. monthly benefit
You can quickly calculate the rate of return the pension benefit offers and compare it to options in the marketplace. This includes annuities offered by insurance companies or professional money managers who diversify and reduce risk. The downside to any annuity - a stream of payments - is the lack of a hedge against inflation where your income stays the same through retirement eroding your purchasing power, or active risk management of the underlying asset to protect your investment in case another recession like 2008 occurs and threatens to wipe out your account value.
As you can see, there are several factors that go into determining the best option for your pension decision. Just as the rest of your retirement planning is personal and individualized, this decision should be made in concert with the rest of your financial picture in mind. A pension plan in any form is a nice employee benefit to have. Just make sure you are optimizing that pot of money the way you would your other retirement plans to ensure the most successful retirement possible.
Have a pension plan and want to talk through your options? Call 800-371-1292 to schedule a meeting with one of our experienced advisors to identify the right next steps for you and your financial future.