This is the sixth article in a series that will help you answer the question, “Can I Afford to Retire?” If you are married and earning a pension, this may be the biggest financial decision of your lifetime. And, it can be a difficult choice depending on how many options you have. In this article I’ll cover the main decision points.
To begin with, we need to consider life expectancy. Today in the U.S., a man can expect to live to age 81, and a woman to age 86. So women are living, on average, five years longer than men. I consistently see people who believe they will die in their 70s because their parents did. Modern medicine is allowing us to live longer.
Diseases that used to kill us no longer do. You need to plan to live a long life, and if that doesn’t happen, it won’t matter to you.
However, it will matter to your spouse as they will need enough income to support themselves.
Pensions have four basic options: lump sum, life only, life with survivor benefits or period certain. A lump sum can be rolled over into an IRA, and penalty-free distributions can begin after age 59 1/2. Some people prefer this choice simply because it gives them control over the money and how it is invested.
However, I always want to look at the guaranteed income side of the pension as they are all different. Here’s an example. Let’s look at a pension with a lump sum value of $400,000, or a life only payout of $1,000 a month. That is a 3 percent payout, guaranteed, for the rest of your life.
Will that level of growth keep up with inflation? Is the guarantee more attractive than a potentially higher return? What if the payout is equal to 6 or 7 percent? These are the types of questions you need to ask yourself.
Typically, if the person with the pension has been the main earner in the family, I will encourage the life with survivor option. I have seen a lot of widows who were living with their husbands on four streams of income, and now only have one Social Security check coming in. That can make for a very difficult retirement. Of course, we have to take into account other savings/income to make a good decision.
Regarding the period certain option, I have yet to see a situation where this makes sense. This option pays out all the money over a specific time frame, then it stops. So, when these payments stop, other income has to replace it. Taking this option just because you need more money today could be a big mistake.
But what if both parties will have pension income, and their earnings records are similar? Or what if a large inheritance is expected? Each situation is unique to the people making the decisions. All I know is this decision needs to be made carefully.
Sherri Goss is vice president of Rosenberg Financial Group Inc., with offices in Macon and Warner Robins. You can reach her by calling 922-8100, or via email at firstname.lastname@example.org.