After a long and satisfying career, you’re finally staring down the barrel of retirement. Traveling, relaxing, seeing family… and suddenly the rose-colored lenses you’ve been looking through are crushed by a stack of paperwork from HR asking how you would like to claim your pension benefits. Single life, Joint life, lump-sum, period certain, spousal benefits with a pop-up provision, and probably several other terms you’re unfamiliar with stick out as you skim over the packet. Worse off, there is likely a deadline on your sheet for you to respond. Cutting through all the jargon on the paper, the packet of information is asking a few questions;
- How healthy are you compared to the average person your age?
- How comfortable are you with risk?
- How much control do you want to have over this money in retirement?
If you can confidently answer these questions, then a financial advisor can help you make a reasonable decision in claiming your pension benefits.
For the sake of keeping things simple, let’s say you have two options only: take a lump sum or take a monthly pension benefit.
In short, a pension system calculates your monthly benefits based on the lifespan of an average person in your shoes, among other factors. If you live longer than that average number, the pension plan pays you more than expected. If you pass sooner, the pension plan pays you less. So given your current health, which side of average do you fall on?
Now let’s think about risk. If you take a monthly pension benefit, the only risk you have is if the company/government paying the pension goes bankrupt. Even then, there are some protections, but it is reasonable to expect your benefits to decrease if the company supporting it goes under. Now if you take the lump sum, you give up your guaranteed monthly benefit, and you face the risk of investing the money to provide for your retirement. You might do better, you might do worse, but you’re in charge.
That leads nicely into the final question about control. Some people prefer to be the commanders of their own ship, and others are happy to be cruisers. It’s your retirement, think about what would make you happiest.
However, we haven’t really gotten to the heart of the dilemma; How do I decide what option is best for me? Even in the example, we didn’t cover any of the complexities of the different claiming strategies or what calculations help guide our recommendations (look for future articles). What we want you to understand is that context matters when making any financial decision. What else is going on in your life that should influence this decision? How are the people I love impacted by my decision? That’s where a financial advisor can help. If you can communicate answers to the first three questions, then we can help you decide how to claim your pension.
Give GBB a call at (916) 269-0671 or complete our contact form to speak with an advisor about claiming your pension.