When you are ready to start receiving your pension benefits, which can often be as early as age 55, there are typically 5 payment options for you to choose from.
1) Lifetime Payment Option: This usually offers the highest payout option because the company is not betting on two life expectancies and they don’t offer any kind of death benefit when you pass away.
2) 50% Joint and Survivor Annuity Option: This will pay you a little less than the first option, but in the event that you pass away it will pay your spouse 50% of that payment for the rest of their life.
3) 75% Joint and Survivor Annuity Option: This will again pay you a little less than the last option but pay your spouse now 75% of your monthly payment if you pass.
4) 100% Joint and Survivor Annuity: This will continue the same payment for both of your lives.
5) Lump sum
The first 4 options are annuity payments. Keep the following in mind:
- If you worked for a company for 20 years and start your annuity payment and pass away that next year, you’ve lost your entire pension balance that you had.
- Your payment will never increase unless there is a cost of living adjustment. So for example, if you receive $3000 per month from your pension and you are age 55 in 20 years when you are age 75 that $3000 won’t buy you as much when inflation is averaging 3% per year. What you were able to buy with $3000 may now cost you $5000. And we all know how inflation works when we look at the rising cost of gas, milk and healthcare. If you choose the annuity option and you run into an emergency and need more than the $3000 per month, you can’t just call them and say “hey I need a new roof, can you give me an extra $5000”.
I typically favor the lump sum option so you have access to your entire account value that belongs to you. If you pass away, your heirs may have something to inherit and there are annuities that you can purchase on your own to create your own guaranteed stream of income while having the payment increase with inflation.
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