What to Consider When Determining How to Receive a Pension Benefit

One of the biggest decisions that a retiree receiving a pension benefit will face could be the decision to take the benefit as a lump sum or receive it in the form of an annuity distribution. The benefit of the annuity is clear. It can provide a predictable income stream for your life and potentially your spouse’s. The income is guaranteed by the company paying the benefit and at least some of it may be guaranteed by the Pension Benefit Guarantee Corporation (PBGC).

The downside to annuity income is that you lose control of how you take the benefit. You don’t have the flexibility to take out more or less of your benefit as needed. There is also the potential loss of purchasing power due to inflation if the benefit doesn’t have a cost of living adjustment.

So what questions should you ask yourself before making this decision?

Do you need more guaranteed income? What will your expected living expenses be in retirement and how much is covered by Social Security and other sources? Is the monthly pension benefit needed to make up the difference? If it is more than you need, see if you could take distributions on a portion of the lump sum and invest the rest.

How is your health? The longer you live the better the annuity option looks. We don’t have a crystal ball, but if you have concerns about your health and outliving your life expectancy, an annuity payment may not be for you.

What is your risk tolerance? If you don’t feel that you have the discipline to stick with an investment plan and ride out market volatility, the annuity payments may be a better option.

What about your significant other? Make sure the annuity would pay an adequate survivor benefit for your spouse if they were to outlive you.

Do you want to leave behind a legacy? Most annuities only make a payment for yours and possibly your spouse’s life, so there will be nothing left to leave behind as a legacy. If you were to take the lump sum, there is the potential for funds to be left over for your heirs or charity if invested properly.

What is the financial strength of your company? If your benefit isn’t fully guaranteed by PBGC, you may run the risk that your company may not be able to fulfill the benefit if they were to run into financial trouble.

Shop Around Even if you decide that the annuity payment option is the way to go, compare the monthly benefit you are being offered to current rates on an immediate annuity from an insurance company. You may be able to rollover the lump sum to an IRA and purchase an annuity with more favorable terms.

How to receive a benefit that you have worked a lifetime for is a difficult choice and depends on your personal needs. Once you make a choice, you can’t change your mind, so it is important to factor in all these considerations before making a decision.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

 

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.