As you are approaching retirement, one of the primary decisions you need to make is what kind of payout to take from your company’s pension plan: single life, which lasts for your lifetime, or a joint and survivor option, which lasts for your life plus that of a designated beneficiary, usually your spouse.
However, you may have questions about the fairness and flexibility of these two basic payout options. What if you die sooner than expected? What if you need emergency funds? If you die prematurely, you lose some of the retirement funds you earned. And, in the case of an emergency, you can’t quickly access your retirement funds due to the fixed distribution schedule. So, how can you get your “money’s worth” out of your company’s pension (with or without survivor benefits), and how can you access additional funds in an emergency?
The answer is a lump-sum distribution. Through this option, you will immediately receive everything you “earned,” granting you total control of your money. The amount of the one-time payout is based on your life expectancy and an assumed interest rate. Next, you can choose to roll the lump sum over into an Individual Retirement Account (IRA), which will allow you to defer taxes until you begin to take distributions. You can take the required minimum distributions (RMDs) from your IRA and, in an emergency, tap deeper into the account. However, there is a potential problem with this scenario: you may outlive your assets. In other words, you do not have a guaranteed income stream for life.
The Best of Both Worlds
If your pension plan offers the lump-sum option, there may be a solution to creating a steady income stream. You can take the lump-sum distribution and set up an IRA rollover, but you can also place a portion of the lump sum into a fixed income strategy. You can set this strategy up before you move the money or after you roll the funds.
By putting some of your money into an IRA, the taxes on this portion would be deferred until RMDs begin. Any other withdrawals you take will be taxed.
Successful retirement planning takes foresight and discipline. If you’re willing to take an active role in managing your retirement funds, you may have a better chance of achieving your retirement goals. Understanding your pension payout options is a great first step toward making informed decisions.
-Jared
