The Decisions You May Only Get to Make Once
By Undrea Smith, RICP®
East Valley Wealth & Retirement
A pension can be one of the most valuable benefits you earn over the course of your career. It can also come with one of the most permanent decisions you will make as you enter retirement.
When people come into our office with a pension, the first question is often pretty simple: “How much am I going to get each month?” That number matters. But it is only part of the decision. When you start your pension, which survivor option you choose, whether a lump sum is available, and how the pension coordinates with Social Security and your other retirement assets can affect your income for decades. It can also determine what happens financially to your spouse or family after you’re gone, and unlike many financial decisions, once you make your pension election and the checks begin, you often cannot go back and change it.
That is why I believe the best time to understand your pension is before you turn it on. When Should You Start Your Pension? Many pension plans provide different monthly benefits depending on when you begin taking income. Starting earlier may mean accepting a smaller monthly check. Waiting may provide a larger one. It can be tempting to assume that waiting for the largest monthly benefit is automatically the best choice.
Not necessarily. Your pension doesn’t exist in a vacuum. We also need to consider when you plan to retire, Social Security, your spouse’s income and benefits, taxes, your savings and investments, your health and longevity expectations, and where your income will come from while you’re waiting. For example, delaying a pension to receive a larger future benefit may sound attractive. But if doing so requires taking significantly more money from your investment accounts in the meantime, we need to understand that tradeoff. Instead of simply asking, “How do I get the biggest pension check?”
I prefer to ask: “How can we use this pension most effectively within your overall retirement income plan?” Those are not always the same answer. Your Survivor Election Matters For married couples, this can be one of the biggest decisions on the pension paperwork. Depending on the plan, you may be able to elect a larger monthly benefit that lasts only for your lifetime. Or you may accept a somewhat smaller monthly benefit in exchange for continuing some or all of that income to your spouse after your death.
A 100% survivor option, for example, may provide continued pension income to your surviving spouse for his or her lifetime, subject to the rules of the specific plan. Essentially, you may be deciding between more household income today and more protection for your spouse later. Neither choice is automatically right or wrong. But before checking a box, I want a couple to understand what happens under both scenarios.
If you die first, how much income does your spouse lose? Can the surviving spouse maintain the same lifestyle? What happens to Social Security income? What other assets are available? The survivor election should be made as part of that bigger conversation. Could Life Insurance Be Another Option? There is another strategy some couples may want to evaluate. Rather than selecting the maximum pension survivor benefit, a retiree may consider taking a higher pension payment and using some of the difference to purchase life insurance intended to provide money for the surviving spouse.
This is sometimes called pension maximization. It can make sense in certain circumstances. In others, it may make no sense at all. Health and insurability matter. So do age, insurance costs, taxes, longevity, the pension’s survivor provisions and the financial needs of the spouse. The point isn’t that life insurance is better than the pension survivor benefit. The point is that you should understand the alternatives before making an election you may not be able to change.
What If You’re Single? This is an area I think deserves much more attention. Many pension systems are structured primarily around the employee and a legal spouse. Depending on the plan, children, siblings, or other beneficiaries may not receive the same survivor protections. Imagine working for 25 or 30 years, retiring and electing the highest lifetime pension benefit. Then you pass away unexpectedly two years into retirement.
Depending on your election and the rules of your pension, that monthly benefit could simply stop. There may be little or no remaining pension benefit to pass to your children or other heirs. For someone who wants to leave assets to family, that deserves serious consideration. Don’t Ignore a Lump-Sum Option: Some pension plans offer another choice: taking a lump-sum distribution rather than receiving monthly payments from the pension. A lump sum isn’t automatically better. Neither is the pension. But when the option is available, I believe it deserves a real comparison.
A properly handled rollover may allow you to maintain greater control over those retirement assets and build an income strategy outside the pension system. Depending on your needs, risk tolerance, and circumstances, that could include investments or insurance-based strategies. In some situations, a portion of the assets might be placed into a private annuity designed to provide guaranteed lifetime income. Certain private solutions may also provide an account value or death benefit for beneficiaries, depending on the contract.
Now the conversation becomes broader than, “Which option gives me the biggest check?” We can ask, How much income do I need? How long does it need to last? What happens if I die first? What happens to my spouse? And is there anything left for my family? Those are the questions I want answered before someone signs the paperwork.
Every Pension Is Different
There is no universal pension strategy. We’ve worked with people coming from school and educator retirement systems, municipal and public employee pensions, state retirement systems, federal benefits, corporate pensions and union plans. The rules can be dramatically different.
One plan may offer a lump sum while another doesn’t. One may have several survivor options. Another may have only a few. Cost-of-living adjustments, beneficiary provisions and early-retirement rules can also vary. That’s why broad advice like “always take the pension” or “always take the lump sum” concerns me. Your decision should start with your plan, your numbers and your family.
Get a Second Set of Eyes Before You Sign
Your pension administrator can be an excellent resource for explaining what your pension plan offers. But there is an important difference between understanding the options available inside the pension and determining how those options fit into your entire retirement plan. Before making an election, consider reviewing your pension alongside your Social Security, investments, retirement accounts, insurance, taxes, spouse’s benefits, income needs and estate goals.
Sometimes the pension’s lifetime-income option is clearly the strongest choice. Sometimes the survivor benefit is extremely valuable. Sometimes the lump sum deserves serious consideration. And sometimes a combination of strategies provides the better fit.
The goal isn’t to find a clever way around the pension system. It’s to understand what you’re giving up—and what you’re gaining—with each choice. The East Valley Perspective At East Valley Wealth & Retirement, we believe retirement decisions should work together. Your pension isn’t just a monthly check. It’s one piece of a retirement plan that may also include Social Security, investments, retirement accounts, taxes, healthcare, insurance and the legacy you hope to leave behind.
So if retirement is approaching and you have a pension decision ahead of you, don’t wait until the election paperwork is sitting on your kitchen table. Get your options. Understand the numbers. Review the survivor provisions. Ask whether a lump sum is available.
Then look at how each choice affects not only your income on the first day of retirement, but your spouse and family 10, 20 or even 30 years later. Because one of the most expensive pension mistakes you can make is discovering the option you should have chosen after you’re no longer allowed to choose it.
Important Disclosure
This material is provided for educational and informational purposes only and is not intended as individualized investment, tax, legal, or insurance advice. Pension rules, survivor benefits, lump-sum options, insurance products, and annuity features vary by plan, provider, and individual circumstances. Guarantees associated with insurance and annuity products are subject to the claims-paying ability of the issuing insurance company. Individuals should carefully review their specific pension plan documents and consult appropriate financial, tax, legal, and insurance professionals before making retirement benefit elections.