Navigating Pension Choices in Retirement

Benjamin Haas |

As the last of the baby boomers reach retirement age they continue to be faced with significant decisions, some of which are irrevocable. One such decision revolves around how to elect a pension. While not everyone has a pension these days, for those who do, understanding the options is crucial. Let's dive into the essentials. 

First, what exactly is a pension? Essentially, it's a defined benefit plan managed by an institution, providing pooled money for employees' retirement benefits. Unlike a 401(k) or 403(b), which are defined contribution plans, pensions are often more like Social Security benefits – paychecks that will come to you on a monthly basis, for as long as you live. 

So, how are pension benefits calculated? Typically, they're based on various factors, including years of service, age, earnings history, or a combination of these elements. Understanding how your benefits are determined is key to making informed decisions on when to elect based on how those benefits may change over time. 

One of the most critical decisions retirees face is choosing between a lump sum payout and a life annuity. Not all pensions will offer a lump sum buy-out, but for those that do, opting for a life annuity guarantees a steady stream of income for life, providing financial security, while the lump sum benefit might come with reinvestment risk and no such guarantees. Another factor is that life annuities often come with no inflation adjustments and no access to a lump sum balance. What you get on day one, is what you’ll get on day 8,000! Deciding between these options requires careful consideration of individual financial goals and risk tolerance. 

When selecting a survivorship option, retirees must weigh the benefits of a single-life annuity versus a joint payment with survivorship. The former ensures payments for the retiree's lifetime only, while the latter extends benefits to a surviving spouse but at a reduced amount. Additionally, some pensions offer alternative survivorship options, such as period-certain provisions or pop-up provisions. Period-certain guarantees survivor benefits for a specified time frame, while pop-up provisions adjust benefits if the survivor predeceases the retiree. Assessing personal circumstances and preferences is essential in making this choice. 

Ultimately, pension election is a nuanced process that requires careful planning and consideration of various factors. What's right for one person may not be suitable for another. Therefore, it's essential to develop a personalized plan, prioritize objectives, and seek professional guidance if needed.  



Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice. Tracking # T007395