Most people go decades waiting for the moment when they get to blow out the candles on their retirement cake, turn their pension on and ride off into the sunset. But hold your horses there, cowboy! There are some things you should be aware of before you sign up for that company pension.
Understanding Pension Risk
Pensions seem pretty awesome when you just consider the offer on its face. What could be better than just turning on the income and letting it flow throughout your retirement years?
But if you pay attention to the news, you know that pensions can be risky. Pensions can go broke or get bought out. Benefits can be reduced and leave you with a lot less than you imagined when you first signed up.
For businesses, pensions are not super-popular. When it comes to acquisitions, the pension is often not something the acquiring company wants to deal with or continue. A purchasing company is always looking for ways to manage costs, and pensions are an easy target. Pensions are expensive for the acquiring company. By removing pensions from the list of future liabilities the financial strength of the acquired business improves almost immediately.
Large corporations are not in the business of providing lifetime income. So while there are many pension plans still out there, the trajectory is for pension plans to go the way of the dinosaur. You just can’t count on them being there.
Understanding Payout Options
Well, that was the bad news. The good news is that some of you still have pensions and you’re going to want that money when the time comes to retire. The biggest decision to make with a pension is what payout to take. The options can be confusing.
We almost always advise to take the lump sum option on your pension and move it to a self-directed IRA as part of a comprehensive income plan, but there are reasons you might want to take more traditional options.
For us here in Iowa, the Iowa Public Employees Retirement System (IPERS) plan is one pension where we suggest people take the more traditional route. We almost always leave these pensions intact and help advise our customers on how and when to start taking the income payout.
Have you explored your options in terms of the payout? There are a few different payout scenarios:
- Single Life – a pension that continues for the life of the pensioner
- Joint Life with 100% Survivor Benefit – some plans allow for the survivor to receive the full benefit. Others have choices which might include 75% or 50%
- Joint Life with Period Certain 20 or 10 Year Benefit – This option provides for a potentially higher monthly payout, but with the risk that the beneficiary survives the benefit. So when the 10 or 20 years are up, if you remain living, you would be without that income.
There is a lot to consider when managing the risks and rewards of a pension plan. Next time, we will go into detail about a few other options you have with your pension, including the single lump sum rollover and an option called Pension Max.