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Pensions & Retirement Plans

If you are lucky enough to be one of the few Americans who have an employer sponsored pension plan, this is the page for you.

What is a pension? A pension is basically another word for a retirement plan. There are two types of pensions.

A Defined Benefit Plan is funded by your employer. The employer guarantees that the employee will receive a finite amount of benefit upon retirement. This is usually illustrated with a monthly payment for life. In some cases, the employee is entitled to a onetime lump sum payment.

If you have a Defined Benefit pension, you will receive a specified level of income that is based upon factors such as your salary, years of service, pay scale and life expectancy.

This differs from a Defined Contribution Plan, where you fund your retirement with your own dollars from your paycheck. Sometimes, the employer will contribute a match for the employee. The final amount of benefit received by the employee depends on the investment’s performance. 401(k)’s and 403(b)’s are types of defined contribution plans.

If your employer provides you with a pension plan, you typically must calculate your benefits using a formula established by the company. Calculating pension benefits can be complex. The calculation will involve making several assumptions regarding the interest rates, size of contributions, number of years of contributions, your earnings, your vesting schedule and age, to name a few.

How do I take my pension? Lump Sum or Annuity Distributions?

Some companies require you to take your pension plan in the form of an annuity payout; essentially monthly payments for your life. More and more companies are giving you the option of taking your pension as a lump sum distribution instead of an annuity payout. You need to carefully weigh out the pros and cons of a lump sum or annuity distribution before making this decision. Deciding which option works best for you involves careful consideration. There are many factors to think about, such as your health, cost of living, assets and savings, and any other income you may have.

Annuity Pension Distribution Considerations:

  • Guaranteed income – As long as the pension plan remains intact, you should receive income for life. Basically you will never run out of money.

  • You may be able to provide a lifetime income to your spouse or beneficiary.

  • Your future pension benefit guarantee is based on the financial stability of your former employer.

  • Benefits could be significantly reduced if they do not properly manage their pension fund.

  • Fixed monthly amounts will not keep pace with inflation. (Some pension benefits have a cost of living adjustment built in, but most do not.)

  • If you are in poor health, a monthly annuity from your former employer may not provide enough money to cover costs of medical bills.

  • Gift and estate planning considerations- Unless you choose a term certain or survivor benefit option, your annuity from your former employer ceases when you die. Monthly annuities may be less flexible and may not pay benefits to your survivors if you die before you retire.

  • Tax Considerations- If you opt for a lump-sum payout, you can roll it over to a traditional IRA and continue to defer taxes. Receiving a monthly check, by contrast, provides you with immediate taxable income. Consult your tax professional about your specific circumstances.

Lump Sum Pension Distribution Considerations:

You have full management over your money. You make the decisions about your funds, not your former employer. Just imagine if you worked your whole life and then found out the money was mismanaged. Unfortunately pension failure is a reality that can sometimes happen.

Gift and estate planning- A lump sum could provide your heirs with additional resources. Be sure to factor your gift and estate planning goals into any lump sum versus monthly annuity decision. If properly managed, you may be able to generate the same amount of income that the annuity would provide and retain control of the principal to pass along to heirs.

Current income needs- If you already have sufficient sources of retirement income (a large portfolio, Social Security, other income, etc.), an annuity may be less attractive. And, because you wouldn't necessarily need to tap the lump sum for current expenses, you could leave it to grow for future use or include it in your gift and estate program. 

How can we help?

As you can see, deciding on which way to take your pension isn’t as easy as it seems. Once you make a choice the decision is irrevocable and permanent. The choice you make can seriously affect the rest of your retirement years and that of your spouse if married.

We are here to guide you so that you can make an educated and informed decision. We want you to feel confident about your retirement plan so that you can get on to enjoying the retirement you so deserve.