In every phase of life there are critical decisions that determine the direction of the subsequent years and decades. Beginning in life, it can be the friends you surround yourself with, later, it can be what career to pursue or who to marry. As life ensues, decisions do not suddenly become less important. In fact, they can determine your lifestyle for the decades that remain. One of those complicated decisions occurs right around the end of your working career. For those who have the opportunity of an employer-sponsored defined benefit retirement plan this decision can quickly become perplexing.
There comes a point in time when you as the beneficiary of a retirement plan, specifically seen in pension plans, must decide on how to receive your accrued benefit. To give you a simple overview, here are some of the most common distribution options that we see in pension plans specifically.
1. Single Life Annuity: This option pays the account owner a guaranteed stream of income for the rest of his/her life. Once they pass away, nothing is leftover to inherit.
2. Single Life Annuity w/10-year guarantee: Similar to the first option, however, less will be paid out monthly to compensate for if the owner passes away within 10 years of initiating the payments – the primary beneficiary will then receive those same payments until the 10th year anniversary from when the benefits started.
3. Qualified Joint Survivor Annuity (QJSA): Many plans provide options to customize the survivor’s benefit. Any customization would then be reflected in an adjusted monthly benefit to the owner. For example, choosing a “50% QJSA” would mean that the surviving beneficiary would receive 50% of the account owner’s previous monthly benefit.
4. Lump Sum/Rollover: If the plan structure allows, all the accrued benefits are paid up front to the account owner in one lump sum amount.
Even when you reach a point where you have understood all the options available to you, the choice is not as easy as a one-size-fits-all. This decision should be reviewed carefully next to your desired lifestyle, needs for liquidity, life expectancy, and Social Security, as just some of the many considerations. Perhaps, as an example, you choose the QJSA with 100% survivorship and accept the reduction of the potential monthly benefits and have the guarantee to the same income benefits left to your spouse/survivor. Or you would like to strategize on the distribution of your benefits and decide to take the lump sum option to have control on the disbursements and potential growth.
Your life is full of decisions, whether you are at the end of your working career or somewhere in the middle. Whatever your situation may be, we recommend sitting down with a financial professional to walk through the variety of choices. This decision will shape perhaps the most adventurous phase of your life!
– Jonathan Dursteler, CRPS®
To learn more about the author of this article, Jonathan Dursteler visit: https://www.adamswealthadvisors.com/jonathan-dursteler-profile or connect with him on LinkedIn: https://www.linkedin.com/in/jonathan-dursteler-312ba8132/.
Adams Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.