Making the Most of Your Pension Plan

Some of you are lucky enough to work for companies that still offer pension plans. Generally, you'll have the option to take a lump sum and roll it over into an IRA, or to take an annuity that pays an annual stream of income. These types of plans are known as "defined-benefit" retirement plans. Making decisions regarding your pension is one of the most important things you'll ever do, so make sure you really think through all the implications.


Weigh your payout options. Typically, a plan will offer a payment for the duration of your life only, or a payout for you and someone else (generally your spouse). If you are planning as a couple, you need to think through what will happen when one of you dies. Frequently, neither spouse will want the money coming in each month to drop in the event of the death of the other spouse. If this applies to you, the 100 percent joint-and-survivor pension may be the best choice. That option continues to pay 100 percent of what had been coming in. If you choose a 50 percent joint-and-survivor pension, your spouse would get only 50 percent of what you had been receiving.

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Consider how much flexibility you might need with your money. If you don't expect to buy many big-ticket items in retirement, an annuity may meet your needs by providing a steady paycheck every month. However, if you know you'll need access to larger amounts of money from time to time, you may be better off taking a lump sum and rolling it into an IRA. Annuities typically don't offer much flexibility. Ideally, if you take an annuity, you'll also have another pool of money you can tap if you need more than your regular check provides.

Know how much of your pension the PBGC (Pension Benefit Guaranty Corporation) covers. You may have some safety net when you choose an annuity over a lump sum. The PBGC may cover all or a portion of your annuity if your company goes belly-up. According to the PBGC's Web site, "For pension plans ending in 2004, the maximum guaranteed amount is $3,698.86 per month ($44,386.32 per year) for workers who retire at age 65. This guarantee amount is lower if you begin receiving payments from PBGC before age 65 or if your pension includes benefits for a survivor or other beneficiary. The guarantee amount may be higher if you retire after age 65 or if you are over age 65 and receiving benefits when the plan ends."

Consider an annuity over a lump sum if longevity runs in your family. When the actuaries figure out how much you'd get in a lump sum, they use average life-expectancy tables. If people in your family live to ripe old ages, you could be better off taking an annuity that will last as long as you do.


Do what all your friends are doing without thinking through the consequences. At the end of the 1990s, a lot of retirees chose a lump sum from their pension plan instead of an annuity - because that's what their friends were doing. After three rough years for the market, I bet many of those people wish they'd thought more carefully about receiving a regular pension check.

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Mess up paying your taxes. Paying taxes was simple when you were working, because your employer deducted what you owed directly from your paycheck. When you retire, you take over responsibility for arranging tax payments. Fortunately, most companies will withhold tax from your pension check if you ask. In some cases, you'll also need to pay estimated tax each quarter.

Take a single-life annuity if people in your family live relatively short lives. A single-life annuity pays only as long as you live.

If your family members tend to live shorter lives, your heirs may be better off with a lump-sum rollover. Or you can always choose a joint-and-survivor annuity that keeps paying your heirs after you are gone.

Forget that an annuity probably won't keep up with inflation. It's easy to forget the dangers of inflation while we've been experiencing relatively low rates. But that won't last forever. When inflation does rear its ugly head, an annuity probably won't keep pace. That's why it's best to keep a separate pool of money that can be invested as a hedge against inflation.

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