Pensions: How To Collect Your Payout

Follow these five simple steps to select the pension payout option that best meets your needs.

Companies are increasingly eliminating pension plans from their retirement benefits, finding them too risky and too complicated to continue offering. If you are entitled to a pension, you may find your payout options to be complicated as well. While there may be enough options to make your head spin, selecting the pension payout best for you doesn’t have to be complicated.

Pension payout options

Generally, there are two main payout options: a lump sum or a monthly annuity. In either case, you’ll have to pay taxes on any payments received. You may also have the option to roll over the lump sum of your pension to an IRA or 401(k) account, but you’ll eventually have to pay taxes on those withdrawals as well.

If you choose to collect your pension as a monthly annuity, you may face even more options. There’s the simple lifetime benefit option, which pays you a monthly annuity over your lifetime. Or, if you’re married and wish your spouse to continue receiving your benefits after your death, there’s the joint-and-survivor option. There’s also an option to receive monthly payments over a set time period, say 60 or 120 months.

How to decide? Just follow these five simple steps:

1. Review all your retirement benefits. Look at any retirement investments you may have, such as a 401(k), IRA or Roth, as well as your projected Social Security benefits. Now estimate your needed retirement income. Will your investments provide the income you’ll need? If so, receiving your pension payout as an annuity for a set time period may work for you—you can choose to receive payments up until the point when your other investments kick in.
2. Determine your investment skills. If you choose to collect your pension as a lump sum, you’ll need to invest it to ensure your funds are available for you when you need them and, ideally, continue to grow until then. Take an honest assessment of your ability to invest this money wisely—and keep in mind any fees you may need to pay to do so, such as mutual fund fees or costs associated with hiring a financial advisor. If you feel you have the ability to invest your lump sum payout, this may be the option for you.
3. Consider your spouse. Before making a decision, talk with your spouse—after all, your decision could affect their financial future. If you prefer a monthly annuity payout, do you want your spouse to continue receiving benefits after you die? If so, select a joint-and-survivor annuity. You won’t receive as much each month as with the single-life annuity, but you can ensure that your spouse will continue to receive payments when you’re gone.
4. Review the strength of your pension plan. Are you certain of the strength of your pension plan? Many private pension plans are insured by the Pension Benefit Guaranty Corporation (PBGC), but not all are—and the PBGC only insures benefits up to a certain amount per month. If you don’t know whether your pension is PBGC-insured or not, ask your employer. The monthly amount the PBGC guarantees changes each year, so be sure to also do some research before making your decision.
5. Find help. Both Vanguard and Fidelity Investments offer free help to participants in plans they administer. Vanguard’s Pension Reinvestment Services offers free phone help from certified financial planners and Fidelity’s Collect Your Pension online site provides helpful resources and tools; if you are a participant in either of these plans, be sure to use the help available to you. You may also choose to receive more personalized help from a financial advisor.

You can wrack your brain trying to determine which option may provide you with the highest payout, but ultimately that will hinge on a number of unknown variables—how long you live, how much your investments might earn (if you select a lump sum payment) and the rate of inflation (if you select annuity payments). Ultimately, the option you select will hinge on which you are most comfortable with and which fits best with your overall retirement plan.

This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.

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