Though nearly one-third of Americans work for employers with company-funded pensions, many people struggle with choosing a payout option. And, once they do, this choice is difficult - if not impossible - to undo. Before deciding your pension payout, ask yourself the following five questions.
How will you pay your post-retirement bills?
Estimate your post-retirement monthly expenses, adjusting for inflation, and calculate how much Social Security will cover. What you have left is how much you need your pension to cover. If Social Security does not come close to covering your monthly expenses, you might want to consider choosing an annuity, which will give you a monthly injection of cash.
Will your spouse continue to need funds after you die?
While a single-life annuity offers the largest monthly payment, it only pays as long as you are alive. If your spouse will continue to need funds after you die, you might be better off choosing a joint and survivor annuity, which will continue to pay your beneficiary after you die. In some cases, you can arrange for payments to continue at 100 percent, 75 percent or 50 percent of what they are when you are alive.
Do you want access to large amounts of money?
If you want a large sum of money at once and your company permits it, you might want to choose a lump sum, up-front payment. You can use this money to create a legacy for your heirs or for large purchases, such as real estate. If you decide later you would prefer an annuity, you can always buy one from an insurance company. Obtaining your funds up front also protects you from potential mismanagement at higher levels.
Can you trust yourself not to overspend?
Those who lack financial self-control may be poor candidates for lump-sum payments. If you fear you fall into this category, choose to receive your pension payments in the form of an annuity to ensure you have adequate assets throughout your life.
Are you willing to gamble on your longevity?
If you are reasonably sure you will live for more than 10 years following your retirement, you might be a good candidate for the 10-Year Certain and Life option. This payout method allows you to receive fixed monthly payments for life if you live for at least 10 years after you retire. If you die within 10 years of your retirement, your beneficiary will collect your monthly payments until the 10th anniversary.
Choosing a pension option can be a complicated process, so if you need guidance to find the most fitting solution for your circumstances, consider hiring an Atlanta financial advisor. This is one of the most important decisions you will ever make, so take the time to ensure you are choosing the best payout option for you.