Pension Decisions – Consider Your Options

In Asset Allocation, Cash Flow and Budgeting, General Financial Planning, Personal Financial Planning, Retirement Planning by Chip Hymiller

There is no doubt that pensions are an extremely important asset and making decisions regarding these plans can be daunting and stressful.  This is especially true since pension decisions are irrevocable!  This article addresses common questions that should be considered when making decisions about your pension.

Many companies are increasingly eliminating traditional pension plans from their employee benefit packages.  However, many soon-to-be retirees will depend on pensions during retirement to provide recurring income.  Here are common questions that should be addressed with regard to pensions:

When is the most appropriate time to begin receiving pension payments?

What pension payment method is best given your individual circumstances—single life, 100% joint and survivor, 50% joint and survivor, “pop-up” options, etc.?

Are there financial planning or tax issues or opportunities to consider as a result of your pension?

Make Pension Decisions in the Context of Your Financial Plan

As with most financial decisions, everyone is different.  This observation is especially true as it relates to pension decisions.  We believe that pension decisions should be made within the context of a comprehensive financial plan.  Here are a few important factors that should be considered:

How dependent is your spouse on this pension? For most people, pension decisions should be made while considering the joint life expectancy of their spouse.  If you were to take the “single life” pension option and subsequently pass away, would your asset base be adequate to cover your spouse’s expected retirement expenses for their lifetime?

Are there existing health conditions that should be considered?  Life expectancy is one of the major factors used when determining pension payouts.  It is important to weigh existing health-related issues when making pension decisions.

Do you have long term care and/or life insurance?  Insurance, from the most basic sense, is a tool that can be utilized to protect assets.  It is important to consider existing long term care and life insurance policies when making pension decisions as they can have a meaningful impact on your asset base over time.

What impact does inflation have on the “real” benefit of your pension?  In most cases, pensions are not adjusted annually for inflation.  Even if there is a slight annual inflation adjustment, it will not likely fully cover the increasing cost of expenses during retirement.  This is especially true as it relates to health and medical-related expenses.  As time progresses, retirees generally find themselves becoming more dependent on their asset base (retirement accounts and other investments) and less dependent on their pension to cover living expenses.

What is your and your spouse’s risk tolerance and how does this impact your pension decision?  This point is often overlooked, but risk tolerance and how your portfolio is invested plays a vital role when it comes to making pension decisions.

For example, those who tend to maintain a more conservative investment approach in their portfolio may find that in the later years of retirement, their portfolio withdrawal rates have increased substantially.  As a result, due to their conservative investment approach, their portfolio may be depleted when assuming an extended life expectancy.  This is an issue that should be addressed, when making pension decisions prior to retiring.

Incorporating Pension Decisions within “Scenario” Planning

A key element of a Retirement Feasibility Analysis is “scenario” or “what if” planning.  Of course, it is impossible to plan or predict all of the variables that will impact a person financially during a 30+ year retirement.  However, it is possible to simulate unexpected events in a manner that can help clients most effectively make pension and other financial decisions.