It's your year of retirement and you need to make a decision about the best way to take your pension payments. At 65 years old, you have more than two decades to live according to the IRS Life Span Table. This means that you possess some long-term considerations in your investment plans.
Pension strategies often give you a choice of the way to receive your benefits. You'll be able to choose between lifetime annuity payments or an immediate lump sum payment. You will want to make sure you discuss these options with your company's Human Resources Department for you to clarify your pros and cons of each option. Here we talk about a few considerations.
Annuity Payments Considerations:
In choosing the annuity payments, find out if your company will be creating the monthly payments itself OR will it be paying a one time deposit to an annuity company for a commercial annuity. If your employer will be making the payments and it goes bankrupt down the line, it might not be able to pay you. In this case, the government's insurance company-the Pension Benefits Guarantee Corporation (PBGC)-would be responsible for the payments.
However, the PBGC offers limitations on the size of their monthly pension payout and will not promise health benefits. You can check out restrictions on the PBGC website. So if you are very well paid with a handsome stream of annuity payments due you, you may lose some part of your monthly payout. For that reason, if your company is willing, an annuity acquired form a highly rated insurance company might be preferable.
Will your company add a cost of living adjustment to your annuity payments? Inflation at an annual rate of just 3% would likely halve the buying power of your payments in 24 years. That's a significant reduction. If the payments usually do not adjust for cost of living, this argues for taking the lump sum that you can invest yourself.
May your employer supplies other benefits along with the annuity payments? As we age, our health sooner or later deteriorates; and the older we are, the more we need to rely on health benefits. Such ex-employer benefits might help considerably to reduce your health charges in the future. In some cases, you only receive the health benefits if you opt for the annuity payments and not the lump sum.
Lump Sum Payment Considerations:
If in fact the company is in poor financial health, you may be happier taking a lump sum now. Doing this you are free and clear of company difficulties. And if you are highly paid, you are going to side step any weak points of the PBGC payouts if your company will be making its own monthly payments to you.
You can roll your own lump sum into a rollover IRA or another type of retirement account and use it for whatever purpose befits you. You might see if you can purchase your very own commercial annuity that offers larger annuity payments than the employer had offered. Ask an independent insurance adviser or financial advisor to have quotes for you from a various annuity companies.
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