I recently pulled together a post on New York teachers and their pension plan. After writing it, I received some questions from readers about their pension. Knowing the options is one thing, but knowing which option is right for you and your family is another entirely!
The truth is, it’s important to know how your pension fits into your comprehensive plan before you choose a pension election option. From having a solid grasp of where your retirement income is coming from, to understanding the emotional pros and cons of each pension election option, there’s a lot to consider here. Let’s walk through how you can start to decide which pension election option is right for you.
Balancing the Emotional and Financial Aspects of Your Pension Options
Choosing your pension payout option is a great example of where numbers and emotions meet in your finances. As much as we’d like to make financial decisions based on numbers alone, we often have to contend with the emotional aspect as well. First, let’s spend a second recapping which pension election options you have available:
Joint and Survivor
Period Certain Options
Pop Up Options
On paper, a Single Life annuity is often the most appealing. It provides the highest monthly benefit for the entirety of your life. However, it doesn’t protect your spouse with a continued monthly benefit if you pass away. Sometimes when I speak with teachers trying to decide on a pension election option, they want to take the Single Life annuity option. More often than not, their reasoning is purely emotional:
“I’ve worked hard over the course of my career, and I want the full amount of my pension - whether or not it protects my spouse after I pass away.”
I can’t argue with that. If you feel passionate about getting your full pension benefit, a Single Life option may make sense. However, I typically recommend pursuing this option only in specific situations:
You have other assets that will sustain your spouse or partner after you pass away
Your partner has a notable pension themselves that will sustain them if you pass away
You don’t have a dependent who will rely on your pension after you pass away
Other times, I speak with teachers who feel emotionally obligated to select an option that ensures their spouse will be taken care of. As a more conservative retirement planner myself, I usually prefer this approach. The consistent income that your pension provides is, in many cases, irreplaceable. Having a consistent amount that your spouse can expect should you pass away can be a game-changer for their own retirement planning needs.
Understanding Your Options if You Take a Lump Sum
In general, I don’t prefer taking the lump sum option when evaluating a pension as part of their retirement plan. While there are some exceptions to this rule, they’re few and far between. Here’s why:
The lump sum option pushes you to do something with those funds. You’re rarely just going to sit on a large amount of cash from your pension when you retire. Typically, you’ll look for other investment options. Most will gravitate towards some type of income generating investment account or an annuity.
The reason these options may be appealing is because they will provide some level of income in addition to having access to the principal (initial investment). For most retirees, managing this money becomes difficult especially during down markets. Additionally, if you aren’t disciplined, the urge to pull money above the income being generated could be detrimental to your retirement income strategy moving forward!
Taking a lump sum from your pension could push you to make an unwise investment decision with a large part of your retirement savings. If not managed correctly, irreparable damage could be done to your retirement income. Be wary of this option, and make sure that you’re weighing all of the possible outcomes of each pension option available to you - not just the one you want to happen.
Your retirement income is comprised of three main components:
The benefit you receive from your pension can often cover most (if not all) of your consistent, recurring, non-discretionary expenses in retirement. This makes it even more important to select the best pension election option for you and your family.
Sometimes, it can be tough to make these decisions on your own. That’s why speaking with a financial planner can help. If you’re struggling to determine which pension option fits your retirement plan best, both financially and emotionally, contact me today. I’d love to help walk you through your options.