Tips and Tricks for Today and Tomorrow #11: What Should I Do With My Pension When I Retire?

Today, let's talk about a big question a lot of people face. What should I do with my pension when I retire? If you're approaching retirement and have a pension, this decision can impact not just your income, but your spouse's future and even your estate. A pension is what's called a defined benefit plan. That means your employer promises to pay you a set amount in retirement, usually based on your salary, your years of service, and the age at which you retire. Now, pensions are less common today. Most companies have shifted to 401(k)s or other defined contribution plans because they reduce the long-term responsibility of paying lifetime income.

If you do have a pension, you'll usually have a few payout options at retirement, and often this decision is final once it's made. Here are the most common options. One, you can do a direct rollover of your lump sum into an IRA. This lets your money keep growing tax-deferred. Two, you can take a full lump sum distribution, but keep in mind this is fully taxable in the year that you receive it. Three, you can elect monthly annuity payments. With annuity payments, you'll often need to choose a survivor benefit option. This could be 0% to your spouse, which means higher income now but stops at your death, or up to 100% to your spouse, which means lower income to start but continues after your death.

So, what option is best? Well, like many things in financial planning, it depends: your age when you start your pension, your spouse's needs, your lifestyle goals, your other retirement income, and whether you want to leave anything behind. Here's something many people don't realize. If you elect monthly income and don't choose a survivor benefit, your pension may not pass anything on to your heirs. This could be a deal breaker if legacy planning is important to you.

Bottom line, this isn't a decision to make in a vacuum. The best way to decide what to do with your pension is to include it in a broader long-term financial plan that looks at your retirement income, your savings and investments, your taxes, your estate plan, and your appetite for risk. If you're weighing your pension options and want to make a decision that's truly right for you and your family, let's talk. I'd love to help you choose with clarity and confidence. Thanks for watching.