Which pension option should I choose when I retire?

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 larry@midwestwealthadvisors.com anytime if you think I can be of help.

2011369/DOFU 1-2018

Beneficiary Designations

In my 21+ years of advising people on their finances I find one often overlooked area is beneficiary designations.  You may be asking yourself why this topic would warrant a full article.  Please allow me to share two stories so you can see the first hand impact of not having your beneficiary designations updated.

Several years ago I received a call from a gentleman who was referred to me when he lost his wife of over 30 years to cancer.  He called because he was going to come into a large sum of money from her pension plan and her life insurance and he had no clue what to do with the funds.  As we started to work up a strategy he called me one day out of the blue and said we may have a problem.  The beneficiary designations on her life insurance and pension plan still had her sister and brother listed from when she started teaching 30+ years ago…a few years before she met him.  Since finances weren’t their specialty they never remembered or were advised to go back and revisit those beneficiary designations and make sure they were updated to reflect him, being her husband, and their 6 children.    Thankfully her brother and sister didn’t fight his claim to the money and after a mountain of paperwork and phone calls he was made the beneficiary of those accounts and the checks were cut to him.  But just think if her siblings had not been so nice.  They could have taken that money and never let him have a cent.

We hear about these types of situations in the media and it is so simple to avoid these problems.  Often times it’s just completing a new form and nowadays as simple as going online and doing it electronically.

More recently I had a client who passed away suddenly.  Months before his death his family situation had changed and made some updates to his life insurance.  One policy he had, not through me, required a new beneficiary change form be completed by him and mailed or faxed back in.  I helped him on the phone with this company get the required form mailed to his residence.  Unfortunately he never got around to filling it out and sending it back in.  As I mentioned, he died suddenly.  Thankfully, everyone in his family acknowledged his wishes and took the appropriated steps and filled out all the required paperwork so the money could go to the people he wanted.  But again, they could have played hardball and won.  Beneficiary designations override a person’s will, so even if a will gets updated, that doesn’t mean those people will get the money that was supposed to be left to them.  The beneficiary designations have to be updated as well to avoid all the trouble that could come down the road.

So please take the time NOW (there is no time like the present) to check your IRA’s, 403b’s, 401k’s, Life Insurance (Private and Work plans), Pension plans or anything else that has a beneficiary designation on it and make sure those designations match your wishes.

The two stories I shared are those I have first hand experience from but being in this industry as long as I have.  However, I have heard many, many stories just like this and not all had happy endings like mine fortunately did.

Have more questions and need some more specific help?  Don’t fret!  Just email me at larry@midwestwealthadvisors with your specific question.  You will get a reply just soon as I am able.