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Pension Option Analysis [Video]

by Trevore Meyer / January 12, 2021

Pension Option analysis decisions can be difficult to evaluate alone.  Although we are beginning to see them less pensions are still a critical source of retirement planning for many people.  Making the right decision with your pension can save you and your family thousands of dollars over time.  Today we discuss things you should consider as you evaluate which option would be best to take your pension.  When you consider these you will be able to stick with your plan for the long-term.

Pension Option Analysis Choices

  1. Lump-sum Pension: If your employer allows you the ability to take the lump sum option we would like you to consider it.  While it may not be your final choice you want to compare it with other annuity options available.  A lump sum rollover doesn’t force you to take an income stream over time. Instead it provides more flexibility of when to take a distribution from that account.  

It’s also important to consider the growth rate of your pension.   You instead get to invest those funds as you would in an IRA or 401(k) you have with your employer. 

  1. Other payment options.  The default option will be for you to have a payment come to you on a monthly basis based on your life expectancy, but there are typically a lot of other options available to you.  One choice we often encourage clients to review is called a joint and survivor option.  This option is based on your life expectancy and your spouse’s life expectancy as well.  The reason you would want to do this is to receive the most out of your pension.  

If something catastrophic were to happen to you while you were taking your pension based only on your life then your payment would stop.  Your spouse would be left with no further pension payments coming in. By electing the joint and survivor option at a 50% or 100% option you would receive a reduced benefit but the expected advantage is a monthly benefit received for both of your lives.  You make sure you have that income for you and your spouse throughout your entire retirement.  These types of decisions make up the decisions needed in a pension option analysis.

When do pension payments start?

Most pension payments start paying out funds at age 65. Let’s call it a normal retirement age.  Now some plans allow you to defer that date to a certain period, like age 67 or 68 but that is subject to a number of conditions. Sometimes you even have the option to take it early, before age 65.  

Now if you do take it early you have what is called a reduced benefit.  That reduced benefit is the same way with Social Security. If you take your benefits early you haven’t had as much time to let them grow and build as much of a cash value.  So you receive a reduced amount.  

If you have a longer life expectancy this reduced benefit might actually still make sense because you are collecting for a longer period of time.  It’s important to coordinate your life expectancy with your payment options because even if you have a shorter life expectancy maybe your spouse doesn’t.  And that’s when the joint survivor option may come into play and be the best option.  

Because of all the possibilities with a pension option analysis like start dates and life expectancy the variables can get overwhelming.  You want to be sure you make the right decision for you and your family. If you have questions about your pension and you are not sure which option makes the most sense, reach out so we can get started helping you. 

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Trevore Meyer

Trevore has nearly a decade helping families with their financial planning needs. He is incredibly passionate about helping folks visualize and explore what their ideal lives look like and following it up by helping them get there.