This article appeared in the March 2019 edition of Nevillewood Living
Having a pension at work puts you in rarefied air. According to CNBC, less than 13% of Americans are fortunate enough to have a pension from their employer, down from 38% 25 years ago. The percentage of private sector workers with a defined benefit pension is now 4%, down from 60% in the early 1980’s. You can see the trend. The pension was a benefit once afforded to most American workers. The responsibility of preparing for income in retirement continues to shift from employer risk bearing plans to other plans, such as 401(K)’s, where the employee bears the risk and for a variety of reasons that shift is likely to continue.
If you are fortunate to have a defined benefit plan, how you choose to receive your pension can be a big decision. Why, once you make a decision you can’t change your mind. Your choice will affect your retirement income for the rest of your life.
Some companies require you receive your pension in the form of a monthly payment or “annuity” for your lifetime. In some cases, options that pensions offer will also include benefits for a surviving spouse after the worker passes away. Making the best choice for your own personal situation requires taking a close look at the exact provisions of your own pension plan. Often, however, you are given the option of taking your pension in the form of a “Lump Sum” rather than the annuity. In some cases, you can take a partial lump sum and a partial annuity. Companies managing pension plans take on considerable risk since they must pay you your monthly check for your lifetime. Pension plans must invest wisely so that the money they set aside to cover future pension obligations would grow enough and be available to pay those future payments. Otherwise, companies would have to come up with additional cash to make those annuity payments. As a result of that risk, companies began to seek ways to mitigate the risk.
So, how do you determine which is best for you?
Recent statistics offer that most people like the lump sum option. They have access to money to invest or spend as they desire. In some cases, you may be able to achieve similar income that the annuity provided, if properly invested, and retain control of the principal. Before electing the lump sum, consider the risks. Having access to the money makes it easy to spend it quickly and if the money is not invested well, or the markets don’t perform well, your money may run out.
An annuity from your pension can provide lifetime income and you have no principal risk since you don’t have the responsibility for investing the money. However, if you have a large pension, a portion of your annuity payments may be guaranteed by the financial stability of your employer. Since most monthly annuities are not inflation sensitive, your purchasing power is likely to erode over time as the cost of goods and services rise and your monthly annuity remains unchanged.
You must calculate the equivalent rates of return, consider the risks and make a decision. You owe it to yourself to make sure your pension works hard for you. By knowing your preferences about whether you want the responsibility for investing your retirement money or would rather leave it in the hands of the pension plan, you’ll be able to make a choice you can live with.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.