If you've worked for a large company for a number of years, you may have earned what is known as a pension benefit. With many pension plans today, you vest after you have completed five years of full-time work.
Make sure that you keep track of the employer(s) where you have earned pension benefits as you move to new jobs and locations. Mail address changes to your previous employers' benefits departments. If they lose track of you and you forget that you've earned a benefit, you could be out a great deal of money.
Deciding at what age to collect
With some plans, you may be able to start drawing your pension as early as 50 years of age — as long as you have worked enough years somewhere. The majority of plans, however, won't give you payments until age 55 or 60. Some plans even make you wait until age 65. If you do have options about when to collect, realize that, in general, the younger you elect to start drawing benefits, the less you are paid per month. That said, here are some pointers:
- Some pensions stop offering higher benefits after you reach a certain age — make sure that you start your benefits before you reach this plateau. Otherwise, decide at what age to start drawing benefits based on when you need the money and/or can afford to retire.
- If you're still working and earning a healthy income, think twice before starting pension benefits — these pension benefits are likely to be taxed at a much higher rate. You're probably going to be in a lower income tax bracket after you stop working.
- If you know that you're in poor health and will not live long, consider drawing your pension sooner.
Don't waste time attempting to calculate which age option will get you the most money. So many assumptions, such as the rate of inflation and the number of years you'll live, are beyond your abilities to accurately predict.
Choosing a payment option
If married, you also need to choose how much money you'll receive when you begin your pension benefit versus how much your spouse will receive if you pass away.
Don't make your selection based on age differences between you and your spouse; those differences are already factored in to your pension options. Pension options differ in how much money you can receive now versus how much your spouse is guaranteed to receive in the event that you die first. If you want to ensure that your spouse receives a relatively high pension in the event of your passing, you must be willing to accept a smaller pension payment when you start drawing the pension. Also, if you're in poor health because of a chronic medical problem when you choose your pension option, lean toward the options that provide your spouse with more.
The following are some of the typical options, ranked in order of providing the most to the fewest dollars at the beginning of retirement. The first choices, which provide more cash in hand sooner, are the riskiest from the standpoint of surviving spouses:
- Single Life Option: This option pays benefits only as long as the pensioner (person who earned the pension benefit) is alive. The survivor receives nothing. The single life option offers the highest monthly benefits but is also the riskiest option. Only consider this option if you have sufficient assets for your spouse to live on in the event of your dying early in retirement.
- Ten Years' Certain Option: This option pays benefits for at least ten years, even if the pensioner passes away within the first ten years of drawing the pension. (The surviving spouse would receive benefits for the rest of the ten-year period.) If the pensioner lives more than ten years, the pensioner continues to receive benefits for as long as he or she lives. The spouse then receives nothing.
- 50 Percent Joint and Survivor Option: With this option, the survivor receives 50 percent of the pensioner's benefit after his or her death. For example, a pensioner receives $1,350 per month. Upon the pensioner's death, his or her spouse receives a reduced benefit of $675 per month.
- Two-Thirds Joint and Survivor Option: With this option, the survivor receives 66 percent of the pensioner's benefit after his or her death. For example, a pensioner receives $1,310 per month. Upon the pensioner's death, his or her spouse receives a reduced benefit of $865 per month.
- 75 Percent Joint Survivor Option: With this option, the survivor receives 75 percent of the pensioner's benefit after his or her death. For example, a pensioner receives $1,275 per month. Upon the pensioner's death, the spouse receives a reduced benefit of $956 per month.
- 100 Percent Joint and Survivor Option: With this option, the survivor receives 100 percent of the pensioner's benefit after his or her death. For example, a pensioner receives $1,200 per month. Upon the pensioner's death, the spouse also receives $1,200 per month.
 | Beware of insurance salespeople and "financial planners" (who also sell life insurance and are therefore brokers and not advisors) who advocate that you purchase life insurance and take the Single Life Option. They argue that this option enables you to maximize your pension income and protect the surviving spouse with a life insurance death benefit if the pensioner dies. Sounds good, but the life insurance expense outweighs the potential benefits. Choose one of the survivor pension options that effectively provides life insurance protection for your survivor. This method is a far more cost-effective way to "buy" life insurance. |
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