In 2017, we wrote an article for STA clients titled, “How Do You Maximize Your Pension Plan.” In that article we shared an in-depth white paper on many things to consider when optimizing your pension plan in coordination with your financial plan. Please refer to the article for a full discussion regarding:
- Choosing between a Pension Lump Sum vs. a Life Annuity
- Issues to consider between annuity options.
- Calculation tool to evaluate the investment risk if you chose to take the pension as a lump sum.
In this article, we will be sharing a new tool helping you optimize your pension decisions between the various annuity options. These decisions may be the most important retirement decision you make, so they need to be thought through as part of a comprehensive retirement and financial plan.
Background on Traditional Pension Plans
If you participate in a traditional pension plan at work (technically known as a qualified defined benefit plan), you will generally be entitled to receive monthly benefits from the plan after you retire. These benefits are usually based on your age at retirement, your years of service, and your average earnings with the company. The normal form of benefit is typically a single life annuity. The single life annuity that makes monthly payments to you while you’re alive and stops upon your death.
If you’re not married at retirement, federal law requires that your benefit be paid as a single life annuity, unless you elect a different payment option. If you are married when you retire, federal law requires that your benefit be paid as a qualified joint and survivor annuity (QJSA), unless you elect another payment option. The QJSA is an annuity that pays monthly benefits to you while you’re alive, and continues to pay at least 50 percent of your benefit to your spouse upon your death.
Depending on your plan’s provisions, you may have other
payout options to choose from as well. Any optional form of benefit offered by
your plan must be at least as valuable (actuarially speaking) as the single
life annuity. You’ll want to select a payment option that will provide you with
sufficient retirement income. In addition, if you’re married, you’ll want to be
sure that your spouse will have sufficient income in the event that he or she
How can you choose the most optimal Pension Annuity Payout Option?
In the above referenced white paper, we describe in detail each annuity payout option, but there are both qualitative and quantitative factors in deciding which option is best for you.
If your pension only has annuity payout options, making the right choice can be one of the most important retirement decisions you make, and it should be coordinated with your overall personal financial plan. For this decision, you must be able to answer the questions below (especially if you are married). To help you better consider your options, we have created this decision tree:
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