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Money Matters/Start thinking about pension payouts now

Published 6:03 pm, Thursday, January 10, 2013
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The traditional pension may seem like a thing of the past. But 56 percent of workers are still counting on payouts from one of these "defined benefit" plans in retirement, according to a 2012 Retirement Confidence Survey conducted by the Employee Benefit Research Institute. If you're among this group, it's important to start thinking now about how you'll receive the money from your pension.

Making a choice

Some defined benefit plans give retirees a choice between receiving payouts in the form of a lump sum or an annuity. Taking a lump sum distribution allows you to invest the money as you please. Plus, if you manage and invest the funds wisely, you may be able to achieve better returns than those provided by an annuity.

On the other hand, if you're concerned about the risks associated with investing your pension benefits, such as losing principal -- or don't want the responsibility -- then an annuity offers guaranteed income for life. Bear in mind that guarantees are subject to the claims-paying ability of the issuing company.

Choosing yet again

If you choose to receive your pension benefits in the form of an annuity or if your plan doesn't offer a lump-sum option, your plan likely will require you to choose between a single-life or joint-life annuity. A single-life annuity provides you with monthly benefits for life. The joint-life option, also referred to as "joint and survivor," provides a smaller monthly benefit, but the payments continue over the joint lifetimes of both you and your spouse.

Deciding between the two annuity options requires some educated guesswork. To determine the option that will provide the greatest overall financial benefit, you'll need to consider several factors, including your and your spouse's actuarial life expectancies as well as factors that may affect your actual life expectancies, such as current health conditions and family medical histories.

You might choose the single-life option, for example, if you and your spouse have comparable life expectancies or if you expect to live longer. Under those circumstances, the higher monthly payment will maximize your overall benefits.

But there's a risk, too. Because the payments will stop at your death, if you die prematurely and your spouse outlives you, the overall financial benefit may be smaller than if you'd chosen the joint-life option. The difference could be substantial if your spouse outlives you by many years.

Your overall financial situation -- that is, your expenses and your other assets and income sources -- also play a major role. Even if you expect a joint-life annuity to yield the greatest total benefit over time, you may want to consider a single-life annuity if you need additional liquidity in the short term.

Providing for your spouse

Choosing between the single-life and joint-life options can be an uncomfortable decision -- essentially, you and your spouse are gambling on each other's lives. And if you bet wrong, the losses can be significant. What's worse, you can't change your decision retroactively.

If you generally prefer the single-life option but it's important to provide your spouse with a continuing source of current income after your death, consider combining a single-life pension payout with an insurance policy on your life. Here you use some of the higher monthly single-life payment to finance premiums on a life insurance policy.

If you die before your spouse, the death benefit provides your spouse with a source of income. If your spouse dies first, you can choose a new beneficiary, such as a child, or simply cancel or cash in the policy.

The viability of this strategy depends on whether you qualify for affordable life insurance. So it's a good idea to wait until your application is approved and the policy is issued before you elect your pension payout option.

Handling the payout

This has been a general discussion of a complex subject and is not intended as advice to anyone. Consult your financial advisor to decide the best way to handle your pension payout.

Norm Grill is a certified public accountant and managing partner of Grill & Partners LLC, accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Greenwich. He can be reached at n.grill@GRILL1.com.