Briefcase Study

Fall 2019: Briefcase Study: The Pension Decision

In Briefcase Study, Income Planning, October 2019, Social Security, Steward Articles, Tax Planningby Adam Cufr

A very common decision for current retirees to make, and one that we’ve seen a lot of recently, is that of which pension option to choose when preparing for retirement from your company, school, or municipality. You’ll see options such as Single Life Annuity, 50% Joint & Survivor Annuity, or Partial Lump Sum Option (PLOP). All of these options can have a dramatic impact on your financial wellness, so we’d be wise to have a discussion about how you might choose which is best for you.

I can never resist making the joke that this decision would be much easier to make if you’ll just tell me how long you plan to live. Because each option has a longevity component to it, we’re really just doing our best to factor your lifespan and that of your spouse into the financial equation to decide which is best.

If we take this to another level, this fundamental question lies at the very heart of all retirement planning. It’s the very reason for retirement planning; if you and/or your spouse live a long life, you’d better have prepared for it financially. After all, the very notion that we might run out of money before dying is the concern that drives most of our retirement planning decisions. As such, choosing how much money to allow yourself to spend each month in retirement is the flipside of the life expectancy coin.

When one of the families we serve delivers us their packet of paperwork outlining their pension buyout and lump sum options, I get to work to spreadsheet various scenarios. These scenarios highlight which option might be the best choice, given various life expectancies.

An example of pension income options might look like this:

The employee will receive at retirement:

  • $2,000 monthly for life, with nothing left for the spouse, should the employee die first. This is usually called the ‘Single Life Annuity’ option;
  • $1,700 monthly for life, with 50% of that ($850) continued for the spouse until the end of their life. This is a 50% Joint & Survivor option;
  • $1,400 monthly for life, with none of that passing to the spouse, but a $70,000 lump sum is also available. This is a PLOP, a Partial Lump Sum Option

So, if you’re married, which do you choose?

As you can imagine, or maybe you’ve already experienced this, the process of choosing can be very nuanced. Maybe the lump sum (which is almost always rolled into an IRA, tax-free) would create a legacy for your grandchildren, or would make for a nice contribution to some long term care planning. Maybe you need maximum monthly income each month and have great family health history and longevity potential, thus leading toward one of the pension income choices.

Each situation is very unique, but the fundamental question is the same: “How long do we think we’ll live, and how do we wish to set ourselves up financially?” Whether you’re presented with a pension choice or not, the moment you step into a retirement planner’s office, you’re contemplating this very question in your own plan.

If you’re considering options similar to these, please let us know and we’ll help you think through it. It’s a great thing in life to have options, but it’s even better if you feel good about the choices you’ve already made.

About 

Adam Cufr, RICP® (Retirement Income Certified Professional®) is a financial advisor and founding principal of Fourth Dimension Financial Group, LLC providing personal finance and retirement planning services. Adam is a Columnist for Retirement Advisor Magazine. He is also a sought-after media commentator and thought leader. Adam was named one of The 20 Most Creative People In Insurance in 2015 and is a columnist for Retirement Advisor Magazine and the author of Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy.

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