Retirement Planning For Dummies
Book image
Explore Book Buy On Amazon
Keeping track of your pension, which is important for planning your retirement, isn’t as easy as logging onto your online brokerage. Most companies are eager to get out of the pension business, so they farm the entire thing out to firms that specialize in pensions, such as Willis Towers Watson.

If you need to call for pension help, you'll probably be talking to people who work for the firm your employer hired to handle the pension plan. However, the site operated by the pension firm will usually look like it’s run by your employer.

How to use online tools

Getting logged into your company’s pension plan usually takes a bit of a work. You might need to call your employer’s human resources department. Then, if your employer has outsourced their pension plan management, you'll probably be handed off to the company running the pension plan.

Most pension systems will allow you to look at the following information:

  • Pension estimate: By entering your dates of employment, age, and beneficiary information, the site will tell you the payment you can expect when you retire, as shown in the following figure. As you can see in this example, the single-life annuity results in the largest monthly payout of $641.39. When you add a 50 percent survivor annuity, you’re looking at a monthly payment of $603.54. The survivor annuity payment is smaller than the single-life payment because the payments are likely to last for a longer period of time. Why? When the pensioner who worked at the company dies, a payout continues to the surviving spouse, who gets only half the payment, just $301.77.
pension estimate Your pension site calculates your expected monthly payment given various scenarios.
  • Lump sum calculator: The pension site should also show your lump sum payment if taken now versus later. This information will help you decide which choice to make.
  • Scenario analysis: Pensions are complicated, with many variables affecting your payout amount. To help you understand the complexities, most pension sites offer scenario analyzers. You enter different retirement ages and whether or not your spouse will get benefits. The scenario analysis calculator then shows how these different choices affect your payout.

You don’t have to be retired to take money out of a pension. If you leave a company, you can activate monthly payments or take a lump sum. However, your payments will be reduced if you start taking them before reaching full retirement age. Also know that if you take a lump sum payout and don’t roll it over into another retirement account, you might trigger a nasty tax surprise.

How to calculate the value of a lump sum payment

One of the trickier decisions with pensions is whether you should take monthly payments or the lump sum. The pension's website can help you make this decision.

Although your decision is final, a workaround exists. You can create your own pension, in a way, by using your lump sum payout to buy an annuity.

By using both your pension provider’s site and an annuity pricing site, you can easily put some numbers around this complex decision. Here’s how:

1. Use the pension's online tool to get your lump sum payout.

Let’s say a 48-year-old worker left a company and wants to take her pension with her. As shown in the figure, her lump sum payout is $70,897.10. The monthly payout amount is $338.46 for a single-life annuity and $337.62 for a ten-year certain and continuous annuity.

retirement lump sum Our retiree can get $338.46 a month in a single-life payout or $70,897.10 in a lump sum.

2. Go to an annuity pricing site, such as and do the following:

a. Enter the lump sum information.

b. Enter your pension details and select the immediate payment option. For the amount to invest, enter the lump sum payout from your pension site. I entered $70,897.10.

3. Compare the monthly payouts.

As you can see in the following figure, the monthly payout from the pension plan is higher than what our retiree can buy in the open annuity market. Using the lump sum amount, the payout from the privately bought annuity is $280 for a single life, which is 17 percent less than the pension payout. Similarly, the pension payout with the ten-year certain option is $675 a month. But with the annuity provider, it’s 6 percent less, or $637 a month.

annuity calculator Schwab’s annuity calculator helps you measure your lump sum payouts.

4. Get another estimate.

You wouldn't get only one medical opinion for a serious health condition, would you? The same is true for deciding what to do with a pension. Many online brokerages and mutual fund companies, such as Vanguard and Fidelity, tell you what size payment you’d get in exchange for a lump sum. For information on annuities, go to Vanguard's site, Fidelity's site, and Schwab’s annuity site (see the following figure).

annuity estimator Charles Schwab’s Income Annuity Estimator helps you determine the income stream from a lump sum pension.

It’s typical for the payouts from a pension plan to be higher than what you can buy on your own from an annuity. An annuity has fees whereas an employer-sponsored pension doesn't.

However, don’t make your decision solely on the size of the lump sum. If you’re young, you could easily invest the lump sum, and then, years later when you’re looking to retire, buy an annuity with the now-larger amount of money.

Rolling over a pension

Never assume you’re trapped in a pension. And that’s a good thing because many workers tend to not stay at the same job for more than five years. When you leave a job, you can take the pension with you by rolling it over.

The rules around rolling over a pension are strict. Even a small mistake can make the lump sum you take from your pension a taxable event. You must rollover the pension into a qualified retirement plan, which for most people means a rollover IRA.

Depending on how long you worked at the company, a rollover is likely a good option. You might consider rolling over your pension if you
  • Know the pension won’t grow: Check the pension's documentation. Many pensions provide only a modest cost-of-living annual adjustment, which is just the inflation rate. If you put the money into a diversified portfolio of stocks and bonds, your portfolio will likely grow much faster than inflation.
  • Don’t expect to retire in many years: The longer the amount of time you have to put your money to work, the better. If you don’t plan to retire in ten or more years, you still have time to put your portfolio into areas that are likely to grow faster.
  • Have other forms of guaranteed income: If you have other options for a steady cash flow, it makes sense to try to get a better return from your pension assets. If you don’t have another form of guaranteed income, you can buy one, such as an annuity, by using other savings.
How do you conduct a rollover from your pension to a qualified plan? The steps are straightforward:

1. Set up a rollover IRA.

All the major online brokerages and mutual fund companies can help you with this task.

2. Initiate your distribution with your pension provider.

Most pension providers’ sites allow you to begin the distribution process. You’ll need to take the lump sum distribution method. The pension provider will mail you paperwork to fill out.

3. Fill out the paperwork from the pension provider.

Your spouse will need to sign a benefit waiver for you to get the lump sum.

4. Make sure the check is made out to the company you’re rolling into.

This step is important. The pension lump sum amount must be made out to the financial firm where you have your rollover IRA. The check should not be made out to you.

Depositing the lump sum and then immediately writing a check to the rollover IRA provider will not work. The Internal Revenue Service will think you took the money and want to tax it.

About This Article

This article is from the book:

About the book author:

Matt Krantz is a nationally known financial journalist who specializes in investing topics. He's personal finance and management editor at Investor's Business Daily. He's also worked in the financial industry and covered markets and investing for USA TODAY. His writing on financial topics has also appeared in Money magazine, Kiplinger's, and Men's Health. Krantz is the author of Fundamental Analysis For Dummies and co-author of Investment Banking For Dummies.

This article can be found in the category: