This question is a big deal! Why? Because the vast, vast majority of the time, your decision is irreversible. You can’t change your mind later.
Always, always, get as much detail as you can from your Human Resource department or whoever handles your pension benefit options. There, often times, many options to pick from and the whole situation can get confusing real fast. Also, HR folks are not supposed to give advice. They can tell you your options but not which option is appropriate for you. This is for good reason, given that they don’t know your whole situation and therefore cannot provide sound advice.
Please, please, please sit down with a trusted advisor, one you have known for years or one you can pay hourly to help you make an informed decision. It will require some time together and you should disclose your financial situation and most importantly your future life goals. That will enable your advisor to give you a recommendation that takes into account your entire situation.
I believe that the most critical variable for most when choosing which pension option to go with is the amount of survivor benefit you wish to leave behind for a spouse. I have seen plans that allow you to leave up to 100% of your pension benefit behind, to as low as 1%. What this means in practical terms is – say as a hypothetical example for illustrative purposes- your employer says you are eligible for $4,000 a month of pension benefit for as long as you are alive. If you pass away, the survivor benefit you leave your spouse could be as much as $4,000 or you could choose to leave $0 behind, the choice is yours and in a lot of states, your spouse as well. Nothing is free in this world, regardless of what politicians tell us J, so you will also be presented with the costs to leave money behind.
In my above example, say you are eligible for $4000 a month of retirement benefit. You might then be told that to leave $4000 behind to your spouse should you die first, then you will actually get $3600 a month of benefit, so the cost to leave behind $4000 is $400 a month. Or you may say your spouse only needs $2000 a month should you die. The cost then might be $200 a month, therefore your retirement benefit would be $3800. These are just two examples, of the myriad of options that may be presented to you through your plan.
The reason I say you would meet with an advisor and disclose your whole financial situation is you may have existing financial products or accounts that can be used in concert with whatever pension payout you choose, for your retirement income needs. I have seen this many times, old financial strategies that may just need a second look with an eye to your current needs and situation.
In conclusion, if you are eligible for a pension from your current or past employer, first and foremost consider yourself lucky (these are disappearing rapidly in the modern economy), secondly you may benefit from a Pension Analysis to see if you can possibly help maximize them. Pensions are a great retirement tool, however; very few who receive this income stream really know how it works and give much thought to the irrevocable decision they are about to make. If you have a pension plan as a piece of your retirement, consider seeking assistance from a retirement income specialist who understands the structure and what options are available to maximize your income and leave the most behind for your spouse, beneficiary’s or estate.
As always, please email me at email@example.com anytime if you think I can be of help.