Making the Most of Your Pension: You have Choices to Make

So, you've got a pension waiting for you when you retire. You might think, "Great, I'm all set for retirement!" But is it really that simple? Yes and no.

Pensions are widely popular, and that regular, predictable income for life sounds pretty nice. But here's the thing: you still have planning decisions to make.

Lump Sum or Monthly Income?

First off, you might have the option to take a lump sum of cash upfront. This can be beneficial if you want more control over your money, like when you start taking income or how it's invested. Some people even prefer this if they don't fully trust their former employer, even though most pensions have insurance and protections in place. It's personal finance, so being informed is key.

Monthly Income Options: What Suits You Best?

If you decide to go with the monthly income, you usually have a few options:

Single Life Annuity

This option typically offers the highest monthly amount. The catch? When you die, so do the monthly payments. This can be great if you're single, but if you're married, you need to consider what happens to your spouse. Would they be able to live comfortably without your pension coming in? And how would you feel if your hard-earned pension disappeared quickly if you passed away young? This option might make sense if you have other significant investments and income sources that can support your spouse.

Joint & Survivor Annuity

This is a really popular choice. It means that when you pass away, your spouse can continue to receive benefits. There are different percentages your spouse could receive (e.g., 100%, 75%, or 50% of your benefit), which will impact how much you receive monthly.

Life with Period Certain

Payments last for your life but are guaranteed for a minimum term (e.g., 10, 15, or 20 years). If you die during that period, payments continue to your beneficiary until the end of the term. This protects against the pension disappearing immediately upon your death and ensures a certain amount is paid out to your family.

Period Certain Only

Payments for a fixed number of years only (e.g., 10 or 20 years), even if you live longer.

Important Questions to Guide Your Decision

I don't have a crystal ball, and neither do you. We can't know exactly how your life will play out. But here are some important questions to help guide your decision:

1. Would my spouse and family continue to live comfortably if I pass away young?

2. Would I roll over in my grave if my hard-earned pension dies young with me?

If your answer to the first question is "yes" and the second is "no," and you want monthly income, you might lean towards the Single Life option. If your answers differ, exploring other choices based on your personal situation is essential.

Beyond the Obvious: Protecting Against Inflation and Unexpected Expenses

One crucial thing to be aware of: most pensions don't protect you against inflation. This means your payment is fixed and won't go up as your cost of living increases. This is another reason to plan ahead! If you're thinking your pension plus Social Security will be enough, you need to evaluate if it will be enough forever, not just for now. Planning ahead can help you decide if you need to save additional money to have liquid funds for future expenses.

Pensions are great for consistent income, but if most of your wealth is tied up in your pension, you might be able to pay your bills, but big lump sums for things like home renovations or new vehicles could still require financing. That's not the end of the world, but it's something to plan for.

Exploring Alternatives and Enhancements

You don't have to stick strictly to the options presented by your employer. You could:

• Take a lump sum and purchase a fixed annuity: This is essentially what your pension is – an annuity. Sometimes your employer's pension offers better terms, but you can review quotes to compare. Additionally, you could take a portion of your lump sum rather than 100% so you can create some monthly guaranteed income and keep the rest invested. This could make sense if you like the idea of a pension but want to diversify where your investments are. This could help you protect against inflation and prepare for large purchases.

• Take the Single Life option and buy a life insurance policy: This can be a decent way to protect your spouse and might be more tailored to your specific needs than generic options presented from your employer.

It's About Your Priorities

Ultimately, there's no single "right" or "wrong" way to take your pension. It's about weighing what you're comfortable with and what your priorities are.

• If you're concerned about capturing your benefit and ensuring your family is okay, financial planning can help you explore lump sum, period certain, and joint survivor options. While these might mean less monthly income, it might help you sleep better at night knowing your pension can still provide for you when you're gone.

• If your primary concern is longevity and being able to confidently pay your bills if you live a long life, the Single Life option might be appealing. Then, you'd consider how to protect your spouse through other means.

We can't predict the future, how long you'll live, your expenses, or taxes. But by understanding your pension options and planning accordingly, you can make more informed decisions that align with your financial goals and the life you want to live.

The information in this blog is the opinion of Nathan Tomkiewicz and does not reflect the views of any other person or entity unless specified. The information provided is believed to be  reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Tomkiewicz Wealth Management, LLC, an investment adviser registered with the State of New York.