What pension you ask? I know. I know. Pensions are a thing of the past. But some of you, albeit not many, are working for companies who still offer pensions. So, this post is for you!
This past week, I met with some new clients who fall into this category. Husband has been working for a company for 30 years. He has contributed to his 401(k) and received a match but he will also receive a pension upon retirement. That pension comes with options: a lump-sum payout or income for life. Before I go and explain the difference between the two, let me be clear that just because you are eligible for a pension does not mean you have a lump-sum option. Every plan is different. If you are unsure about your options, simply call your HR Department and ask.
I have talked to hundreds, maybe thousands, of people who have made the mistake of taking income for life when they had a lump-sum option. They get the statement in the mail that says they will receive $2,000/month for the rest of their life, they figure that and social security is more than they need to get by and they sign on the dotted line...an irrevocable decision...you can't change it. There are several reasons why people are drawn to income for life. In fact, we are a fan of income for life at JondaKnows. However, the income-for-life that comes from a company pension does not provide a great deal of flexibility. For example, if you are married and want your spouse to continue receiving income after you die, the monthly income drops significantly. I've talked with many widows whose husbands opted for single-life income because they felt like they needed the extra money to live on. With the husband gone, so is the income in this example...the income was to be paid out over a single life.
Here's a question for those of you who are patting yourself on the back because you chose the joint-life income so that your spouse will receive a portion of your income after you die. What happens if your spouse dies before you do? With joint-life income, the income stops after both the owner of the pension and their spouse dies. The retiree has been retired one year and loses his wife to a car accident. He continues to receive his $2,000/month for another year after her death then he dies of a heart attack. In this example, the retiree had a $350,000 lump-sum option but opted to receive income for life which turned out to be $48,000. Let me be very clear. The income stops. With a couple of rare exceptions, there is no payout to a beneficiary. The retiree traded $350,000 for $48,000. Ouch!
Is there a better option? Yes. Yes I believe there is. Here is where I need you to open your mind and think for a minute. How does your employer provide you an income for life? Do they take the risk of you living to be 105 and having to pay you $24,000 for 40 years? Heck no! They shift that risk to an insurance company. They take the $350,000 lump-sum that you turned down and purchase an annuity contract. The insurance company is now responsible for paying your monthly income. If you die prematurely, they win. If you outlive your life expectancy, they lose. Guess what? They don't lose very often. That's why I believe it makes the most sense for the retiree to take the lump-sum option and roll it into an IRA. Within the IRA, you can purchase your own annuity that will pay you income for life, will continue to pay that same amount of income to your spouse when you die AND if there is a balance in your IRA when you pass away, it is paid to your beneficiary(s)...someone you love. Doesn't that make more sense than letting the insurance company get rich off your pension?
Here's what I want you to take away from this post. If your employer can generate income for life, so can you! By working with an experienced insurance agent, you can design an annuity that will provide your family with the income they need even after you are gone and should both you and your spouse pass prematurely, the balance of your account will pass to your beneficiaries. That sounds like a much better option to me :-)
If you have questions or would like to discuss your pension options, you can reach an experienced insurance agent at 304.840.0001 or toll-free at 844.455.6697.