You are just at retirement age and need to decide the best way to take your pension payout. At 65 years old, you have over two decades to live according to the IRS's Life Expectancy Table. This means that you may still have some long-term considerations in your investment plans.
Pension plans often give you a choice of how to receive your benefits. You can choose between a monthly payout for life, i.e. an annuity pension, or an immediate lump sum distribution. You will want to make sure you discuss these issues with your company's Human Resources Department to clarify your options. Here we discuss a few considerations about each option.
Annuity Pension Considerations
In choosing a annuity pension, find out if your company will be making the monthly payments itself, or will it be paying a lump sum to an annuity company for a commercial annuity. If the company will be making the payments, but it goes bankrupt down the line, it may not be able to pay you. In this case, the government's insurance company–the Pension Benefits Guarantee Corporation (PBGC)–would take over the payments.
However, the PBGC has restrictions on the size of its monthly pension payout, and will not guarantee health benefits. You can check out restrictions at the PBGC website. So if you are very well paid, you may lose some amount of your monthly payout. Therefore, if your company is willing, an annuity pension purchased from a highly rated insurance company may be preferable.
Will your company include a cost of living adjustment in your annuity pension? Inflation at an annual rate of just 3% would half the buying power of your payments in 24 years. That's a significant reduction. If the payments do not adjust for cost of living, that fact argues for taking the immediate sum that you can invest yourself.
Will your employer supply health benefits along with the annuity pension? As we age, our health eventually deteriorates; and the older we get, the more we need to rely on inexpensive health benefits. Such benefits may help considerably to reduce your health costs in the future. In some cases, you only get the health benefits if you opt for the annuity pension and not the lump sum.
Lump Sum Payout vs Annuity Pension Considerations
If in fact your company is in poor health, you may be better off taking a lump sum now rather than the annuity pension. That way you are free and clear of company problems. And if you are highly paid, you will side step any shortcomings of the PBGC payouts if your company would be making its own monthly payouts to you.
You can roll your lump sum into an IRA or anything else and use it for whatever purpose suits you. You might see if you can purchase your own annuity pension that pays better than the company's monthly payout. Ask an independent insurance agent or financial advisor to get annuities quotes for you from a variety of companies.
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