If you’ll be receiving pension payments in retirement, consider yourself one of the fortunate few. Pensions are quickly disappearing as an employer benefit. In 1998, 58 percent of Fortune 500 companies offered pensions, also known as defined benefit plans. By 2015 that figure was down to 20 percent.1
Many employers have transitioned to defined contribution retirement plans, like 401(k)s. Such a move relieves an employer of the burden of funding its employees’ retirements. In a pension, the employer is responsible for funding the plan and paying retirement benefits. In a 401(k), the employer may make some contributions, but much of the funding responsibility lies with the employee.
If you have a pension, however, you will likely benefit from predictable retirement income that’s guaranteed for life. That can help you overcome a savings gap and possibly live a more comfortable lifestyle.
There may be some elements of your pension benefit that require advanced planning. Below are a few tips to help you make informed decisions and better plan for your retirement:
Consider your beneficiary needs.
Most pension plans offer a variety of payment options. One of the most common is a straight lifetime payout. This means the plan calculates a payment amount that’s guaranteed to last for your lifetime, no matter how long you live. The amount is based on your earnings history and your life expectancy.
However, it may be possible that you want your payments to continue for your spouse or some other beneficiary after you pass away. Most plans also offer a joint payment option in which the benefit lasts for two lives. While this reduces the payment amount, it ensures that both spouses will receive payments as long as they live.
You also may be able to choose an option with a period certain. In this scenario, your payment is guaranteed to last for a minimum period of time, such as 10 or 20 years. If you pass away during this period, the payments continue for your beneficiaries until the guaranteed duration is up.
Consider your income needs as well as your beneficiary needs when choosing your payment option. There’s no payment term that’s right for everyone. Your selection should be based on your specific needs and goals.
Plan ahead for taxes.
If your plan is like most, it was funded with pretax contributions from your employer. Most pension funds also grow on a tax-deferred basis. At some point, pension dollars have to face taxation, and that time is usually when payments are made to plan recipients.
If you will rely on pension income in retirement, it’s possible that some or all of that income will be taxable. It’s important to understand what your tax exposure may be so you can budget accordingly. A financial professional can help you map out your pension and all other taxable income so you can create a tax strategy.
Find out if you can take a lump-sum distribution.
Some plans allow you to take your benefit in one lump sum. In this option, you are paid a discounted lump-sum amount instead of receiving lifetime payments. Of course, if you take your entire pension in one payment, you could face a sizable tax bill.
Instead, consider rolling the payment into an annuity. The pension goes into an annuity, which would allow you to avoid tax exposure and take advantage of tax-deferred growth going forward. This isn’t the correct strategy for everyone, but it may be worth exploring.
Ready to develop your pension benefit strategy? Let’s talk about it. Contact us today at Intelliplan Financial. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
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