Thoughts of retirement are often accompanied by images of the enjoyable ways you’ll spend your days. One thing you may not even consider, though, is that you may be faced with a very important decision come retirement day.

If you participate in a company pension plan, you’ll have to decide how you want to receive your pension proceeds. For this reason, take the time now to consider your options, so when the time comes, you can make the choice that’s right for you.

Typically, most pension plans give retirees the following choices:

• Income for the rest of your life (single life option)
• Income for the lives of both you and your spouse (joint and survivorship option) 
• A lump-sum distribution

At first glance, you might think your marital status will dictate which option is best for you. But, there’s a lot more to it than that. Let’s take a closer look at the options. The first two options (single life and joint and survivorship) provide you with a fixed income (usually in monthly installments) in exchange for your pension balance. The third option (lump sum) allows you to take your entire pension balance, and you can manage it yourself.

If you’re worried about outliving your assets, regardless of your marital status, you should take one of the two "income" options. It’s a simple way to ease your fears about running out of money. If you’re single, this choice is easy because you can select only the single life option. If you’re married, however, it’s a different story altogether because you can choose either income option.

The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, payments continue until the death of both you and your spouse. If you have other substantial retirement assets or your spouse has his or her own pension, taking the larger income offered by the single life option may be your best bet. On the other hand, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option might make sense.

As you carefully review these two income options, keep in mind that there may be an actual "third" income option. This third option is really a combination of the first option—the single life option—and life insurance. By taking the higher income with the single life option less taxes and using some of that income to pay the premiums on a life insurance policy, you may be able to "net" more income than with the joint and survivorship option. All the while, your spouse will be protected by a potentially significant life insurance death benefit. After your death, the death benefit proceeds will be received income tax free by your spouse and can be used to help fund his or her own retirement income.

The success of this strategy—often called "pension maximization"—depends on your age, your health, the type of insurance policy, and the schedule of premium payments. The issuance of a life insurance policy is subject to underwriting approval, and the issuance of a policy at a reasonable premium is not guaranteed. If the premium takes up too much of your monthly benefit amount, this strategy may not make sense. In addition, guarantees of a life insurance policy are based upon the claims-paying ability of the insurer. You should analyze your situation carefully with the assistance of a financial professional before proceeding with this strategy.

As previously mentioned, selecting either income option requires that you give up your pension balance in exchange for income. In other words, you can’t just select a payout option one day and then decide at a later date that you’d like to receive your remaining pension balance in a lump sum. With this in mind, let’s turn our attention to the final payout option—the lump-sum distribution.

Taking Control
If you want full control over your pension assets during retirement, or if you are concerned that your pension income may not keep pace with the cost of living, then a lump-sum distribution could be the thing for you. You can take a lump-sum distribution in one of two ways. You can either roll it over into your own Individual Retirement Account (IRA) or receive the pension proceeds net of income taxes. Unless you plan on using your pension assets for something other than retirement, don’t even think about receiving your lump sum net of income taxes. The IRA rollover makes the most sense because you’ll continue to receive the benefits of tax-deferred accumulation and only be taxed when you take withdrawals from the IRA.

As you can see, before you relax into a comfortable retirement, you must make a difficult decision about your pension proceeds. This will require you to consider several options and determine which one best meets your financial needs and goals. Contact Paul Tamagni for more information. $