How Can I Get My Pension Money Now?

By Michael Mikonis

You’ve worked and saved all your life and are nearing your retirement date - you likely have a lot of questions and many checkboxes to check before you can confidently wave goodbye to your colleagues. One of the most important decisions you have to make at this point in your life is HOW you want your pension benefits paid to you.

The primary question you must answer is whether you want to take your pension as a lump sum distribution or as an annuity and receive monthly payments? Each choice has its own advantages and disadvantages, but largely depends upon 3 things:  Your retirement income needs, your life expectancy, and your legacy desires. 

Depending on monthly payment option you choose, a monthly annuity can provide you and your spouse with guaranteed income for life. This alone can provide a lot of comfort in knowing that at least these dollars will continue to be deposited into your bank account until your very last day – and is the most common reason cited by retirees who choose this option.

How to get your pension

The biggest concern for someone who opts for this type of pension will be inflation. Very few pensions out there have COLA (Cost Of Living Adjustment) feature, and over the years, inflation will erode purchasing power of your monthly benefit, which will result in your lifestyle shrinking over time. This concern is of even higher importance to retirees that do not have additional savings which could be used to supplement pension income when needed.

The second issue you should consider is that a monthly income stream may not lend itself very well in case of an emergency – if you would ever need a large sum of money, for whatever reason – and do not have other assets to pull cash from, monthly income stream can prove to be a rather frustrating bucket of money that you “have, but don’t have”. If you have limited savings outside of your Pension, you may want to think about taking a lump sum distribution instead, to afford more flexibility in retirement years.

Third concern that most often comes up during unstable economic times, is whether the company you worked for will stay in business to pay the benefits you earned. There is a degree of protection provided by the Pension Benefit Guaranty Corporation, which is a Government Agency that is supposed to step in and continue making your pension payments to you in case your employer goes bankrupt, but it may not cover 100% of your benefit. Currently, the maximum guaranteed amount is $5,607.95 per month – which means that any benefit amount that is above this monthly maximum amount – is at risk in case your employer goes the way of a type writer. If you work for a company that might be facing financial difficulties (GE and Stein Mart come to mind) you may find it more reassuring to roll your pension into an IRA instead of leaving these assets with your employer.

Your health is another important factor that needs to be considered. If you pass away only a few years after you begin drawing your pension benefit, depending on which payment option you picked - the benefit may stop. If you elected a “Joint” benefit, your spouse may receive income during her life – however long or short that may be, passing nothing to your heirs. If your or your spouse’s lifespan is diminished due to illness, it might make more sense to take the lump sum instead of “lifetime” income.

Last but not least, you have to take into consideration legacy aspect of this decision. Depending on the payout you pick, when you pass away, your spouse may still be entitled to receive your pension benefit, but when they pass away – your heirs will not receive a dime. If legacy is of importance to you, you may want to think through your plan and see if monthly payout option would work in your favor.

There are a quite a few Pension Distribution Options available out there, but most often come in formats below. You will likely see them in the retirement packet you receive from your employer:

  1. Single Life: This choice will generally show the highest monthly amount of all choices. That is because monthly payments are calculated to last only over your lifetime – however long or short that is. If you pass away 3 months after you retire, your pension will pay out only 3 monthly payments, potentially putting your spouse in a difficult financial position.

  2. Single Life with Term Certain: This choice will pay the longer of either your lifetime, OR number of years defined as “Term certain”. Other way to think about this choice is that the pension will continue for the number of years defined as “Term Certain” at a minimum, but will continue on if you live longer. If you pass away before the Term certain runs out, the person you select will continue to collect for the remainder of Term Certain. For example, If you opt for “Single Life – with 5 year Term Certain” and pass away 3 years after your benefits start – your beneficiary will keep collecting for another 2 years. Typically the longer the Term Certain is – the lower your monthly benefit will be.

  3. 100% Joint-And-Survivor: This option will continue to make monthly payments throughout both spouses’ lifetimes and will never change. Since this payout option covers two lifetimes and there is no reduction in payout amount – this payout will usually have the lowest monthly payment among options provided to you. 

  4. 50% Joint-And-Survivor: Another variation of the option above, but with a reduction in benefit after you pass away. If your payment under this option is $2,000 per month, your spouse will receive $1,000 per month after your passing. You will likely see a few more choices in the retirement packet, the continued benefit varies from plan to plan, but most common options include 75%, 50% and 25%. If you were to pick a “25% Joint-And-Survivor” option and your benefit was $1,000 per month, your spouse would continue to receive 25% of your benefit, or $250 per month. Once again, the lower the continued benefit – the higher the initial monthly amount.

The option of taking your pension benefits in one lump sum may seem either very exciting, or very scary – depending on how much control you want over your assets, and the degree of comfort you have in making financial decisions. A very common gut reaction when evaluating pension income against a lump sum payout is to see which bucket of money is bigger: all monthly payments added together, or the lump sum distribution. You may put that calculator away, the lump sum payout option is typically calculated to be EQUAL to a Net Present Value of your age 65 monthly benefit amount you would receive over your lifetime, discounted to today at prevailing interest rates. 

Likely the scariest part of taking a lump sum distribution is that you will be responsible for managing these assets and making sure they last through your and your spouse’s lives. Hopefully, you are not alone in making this decision and have a financial advisor whom you trust and who has a proven track record of managing assets well during the good and the bad times in the market. This is where a good financial advisor can advise you how much income you could realistically expect from your portfolio to make it last for both you and your spouse, and perhaps even leave a legacy for your heirs, if that is your goal.

To summarize, while the idea of guaranteed monthly income may be comforting – there are a lot of nuances specific to everyone’s situation that need to be considered. Health and longevity expectations, legacy desires, how comfortable your retirement picture seems, financial prospects of your employer, etc. The lump sum distribution can eliminate a lot of those headaches, but comes with its own considerations. Should have advisor who you trust is able to manage your funds, coach you during difficult decisions or uncertain times and you should have enough spending discipline to ensure these funds last.  

IMPORTANT DISCLOSURE INFORMATION

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RetirementA.S.Michael Mikonis