Many of our parents and grandparents entered their retirement years after working for a single company. With all of those years of service came a lifetime pension, income they will receive until their last day. Believe it or not, pensions still exist if you know where to look.
Let’s start by explaining what a pension is, what employers are still offering them, and how you can be eligible for one. We’ll finish with how to claim your pension and how to determine the right payout option for you.
A pension is a defined benefit plan offered by an employer that guarantees automatic payments or a stream of income starting in retirement and lasting for your lifetime. Income is typically determined by a formula using salary and years of service and a company defined factor. Years ago, many companies offered pensions as a reward for loyalty.
If you are looking for employers who still offer pensions, consider the public sector. Most federal, state and local governments offer pensions. Public school systems (part of your local government) offer pensions. Many universities offer pensions. Large companies (those with 500 or more employees) are still offering pensions. And companies in certain industries (utilities, insurance, engineering) offer pensions. Companies offer pensions as an incentive to hire employees who stick with them for years.
It is common for companies who offer pensions to require a vesting period, meaning a period of time that you must stay employed with them to be eligible to receive a pension. Five years is a common vesting period. There may be some requirements to work full-time versus part-time. There is often a minimum age requirement before your pension will start paying.
When the time comes to start your pension there are hard decisions to make. If you are single and no one else depends on you for income you will mostly likely select the full pension. But if you are married and your spouse will need income after you pass away, you must examine and analyze your pension options to see how they affect your income and the income of your surviving spouse.
Many pensions offer payout options like this: lump sum, single life, joint life 50%, period certain. The right payout option for you is determined by your personal circumstance and your financial needs/goals.
Let’s break these down.
A lump sum payout is just that – you receive 100% of the present value of your pension up front as a lump sum. You are then responsible to determine how to invest and manage this lump sum to provide lifetime income.
Single life – you receive your calculated pension (typically determined by a company-defined factor, your salary and years of service) for your entire life. When you pass away, your pension goes away.
Joint Life 50% – you receive a pension that lasts a joint lifetime for you and your surviving spouse. This may also be referred to as a Survivor Benefit. While you are living, you receive a reduced pension. Upon your death, your spouse receives 50% of your pension for the remainder of their life. Pension plans may offer additional payout options for the surviving spouse: 25%, 50%, 75%, etc. Keep in mind that the reduction you receive while living will be tied to the lifetime payout percent for your surviving spouse.
Period Certain – your pension will be paid out for a specified number of years to you, your spouse or a designated beneficiary regardless of when you pass away.
As you can see, having a pension can be a great resource for retirement income. But deciding which payout option makes most sense for you can be daunting. Any payout decision should be made after a thorough analysis of retirement income and expenses has been completed. This analysis should review income and expenses while both spouses are living, income and expenses for the pension owner as surviving spouse, and income and expenses for your spouse as surviving spouse. Other considerations should include your health, the health of your spouse, and other sources of income including, but not limited to, social security, retirement accounts, rental properties, and other investments.
With a pension, you may have the 3-legged stool of retirement income (social security, pension, and personal savings) that your parents had. To maximize these sources of income over your retirement, we recommend starting this payout conversation with your financial advisor about 5 years before you plan to retire. This gives you time to verify that your retirement timeline is realistic and that your income needs can be met so that you can enjoy a rich, fulfilling retirement. Understanding your pension and the payout options can do just that.