After putting in many years of work you decide it’s time to retire. You do as everyone does and schedule an appointment with your company’s retirement officer. You gather your options and review in angst as to which option works best for you. In some cases you may have in addition to your pension a deferred compensation plan.
You now gave to decide how to take your distribution of your pension based on whether your single or married. Obviously if your single you don’t heed the survivor option because you don’t have a spouse to provide for. It’s pretty straight forward, you take the full pension. If your married this is where it gets a little dicey.
You can elect to take your full pension and not elect for a survivor benefit. This gives you the full benefit but if you predecease your spouse, they will not receive any income as the benefit ceases upon your passing. Maximum monthly income during your lifetime is provided to you.
You can elect to have a survivor benefit for your spouse to continue to provide a reduced benefit if you predecease your spouse. To provide this benefit you may see a significant drop on your monthly income to provide this income for your spouse. If your spouse (beneficiary) predecease you the benefit is lost, you do not get that portion of the pension you were allocating to the spouse.
Another option is that you have a survivor option with a pop up window that basically allows you to recover the portion of the pension your leaving to your spouse / beneficiary. This is good but also will proved lower current income than the last option.
The best option is generally option 1, the full pension. The retirement officer can tell you what that benefit is and compare it to the survivor benefit. This allows you to calculate the amount it will cost you per month to provide the survivor benefit. An example is if your full pension pays out $1000 monthly and to have a survivor benefit your monthly benefit decreases to $600 a month to leave a 50% benefit to your spouse. In this example it would cost you $400 a month to leave your spouse income in the case you pass before your spouse. However if your spouse predecease you, the benefit it lost and you cannot recover those funds allocated to your spouse assuming you have no pop up to recover those benefits. However that would lower the pensions monthly income level further as stated earlier.
If your not in good health you have to decide which option works best for you. However, if you are reasonably healthy you can take the full maximum pension and purchase a life insurance policy. In most cases you can allocate a decent portion or all of that $400 or a portion of that $400 to a life insurance policy. Generally, you will be able to provide more guaranteed income for your spouse through the life insurance policy. In addition if your spouse predecease should, you can just change the beneficiary and leave the funds to a person or charity of your choosing.There is no loss of benefit here and you maintain direction and control of your funds, most importantly us you still receive the funds and can leave them tax free to any person you choose or charity. In addition the life policy probably in most cases has living benefits such as access to the funds for health reasons such as long term care and terminal illness causes. Of course it may be slightly reduced but you can benefit if needed as compared to years past where only the beneficiary received a benefit.
The deferred compensation plan or other qualified retirement plans, can be rolled over to another institution as well. Using the same premise of finding out what the monthly benefit is you can compare it to other Rollover products rates to see if you can get a better return. Additionally with deferred compensation once you exercise your right to receive the income, turn in the income, you cannot turn it off and don’t gave any other options. If you roll it into a fixed income annuity you can take partial payments, annual payments, installments, turn it on and off as income is needed. You do have a beneficiary, it can provide lifetime income riders, long Term care clauses, terminal illness clauses to access those funds for care while living. Ultimately you have direction, control and more benefits that leaving it in your deferred compensation plan at work.
The I.R.S. also has listed guidelines under which these transactions are regulated since they are qualified funds.
I.R.S. Rules on Rollovers
Speak to your local insurance broker or financial advisor for more information and to find out more about your options.