Understanding Your Pension Options


May 25, 2021

Those that are fortunate enough to have a pension have a sense of comfort in the guaranteed income for the rest of their lives upon retirement. That guaranteed income certainly takes some of the guesswork out of retirement planning, but it does not eliminate it by any means. Once you are ready to move on to the retirement chapter of your life, you are presented with a list of options regarding your pension. Wait, what? Don’t you just sign a couple papers and start collecting checks? It isn’t quite that easy. Most pensions have a cash option that is offered as an alternative to the income for life. Many government workers and teachers are provided with a cash option in addition to their income benefit. These are all good problems to have, but the decisions associated with them are important ones that will impact you and your loved ones.

Cash Option

The cash option will be a tempting alternative to the guaranteed income. It is just enough money to make you think about it. You have to be honest with yourself about your situation. Take a look at all of the other assets you have and determine if you can live off of them comfortably when you add the pension cash option. It does offer some flexibility in that you can use the money on your terms. It also puts you in a position to keep up with inflation. Your $4000/month pension today isn’t going to be worth $4000/month 20 years from now.

If you are choosing the cash option or have a cash option as part of your benefit, it is critical that you understand the taxes associated with it. There are rare cases in our blog where we’ll offer a blanket definitive answer. This may be the one and only. Make sure you open an IRA to roll the money over to rather than just taking a cash payment to yourself. The rollover will enable you to continue to defer the taxes rather than paying income taxes on what is likely to be a large sum of money.

Survivor Options

The survivor benefits can also be confusing. The highest amount of income available to you will come with no survivor benefit meaning it ends when you pass away. That can leave a big hole in your spouse’s income if you are the first to die. Most couples select some type of survivor option. For a reduced income, you can ensure that your spouse will receive all or a portion of your pension income in the event of you predeceasing him or her. The options usually include a 50% survivor benefit and a 100% survivor benefit. The 50% benefit means that he or she will receive half of your benefit upon your passing and 100% offers the full benefit. The 100% benefit will offer you the least amount of income, but it obviously comes with the security of knowing that your income is guaranteed for the rest of both of your lives. You both would have to look at your situation to determine what is best for you.

A pension is a great benefit to have and is obviously a critical part of your withdrawal strategy if you are fortunate enough to have one. Make sure you take the decisions seriously and take the time to make a plan. Most employers offer resources to assist you with your decisions and there are also professionals who are well versed in these benefits. You worked your whole life to earn this benefit. Make sure you put yourself in a position to maximize it. 

IRA Rollover Considerations


Get Started