Pension Mistakes You Can’t Afford to Make

Congratulations!  You’re nearing retirement and counting the days when your pension kicks in and you can start living the good life with a steady income.  All you have to do is fill out some paperwork and sit back and relax….Retired

The key for this to be a reality is to understand you have to get this right the first time, because there’s no second chance once you hit retirement. It’s a choice you’re making that has profound implications on the last 30 years of your life and will also impact a spouse and heirs.  Every pension plan is different, and despite employer information sessions, retirees make a lot of damaging mistakes.  The three biggest ones I see in my practice are:

#1 – Not understanding your options

Pension options have been expanded in recent years to offer more than just the traditional single or joint life choices.  Will you just take a stab at a scenario that looks good, or run the numbers to see how each of those choices look over the long haul?  Too many retirees see less income or leave a spouse with not enough to live on because of their uninformed choices.  Take responsibility for your retirement security by educating yourself thoroughly on what the options mean. Do you know that your company’s pension will be forcing you to buy life insurance when you accept a survivor benefit option and pay a life insurance premium for the rest of your life? Please contact us so we can show you how to maximize your pension income.

#2 – Not analyzing the options in the context of your own situation

There is no “one-size-fits-all” solution.  While no one has a crystal ball to predict how the future will play out, it is irresponsible to make a decision without considering the following:

  • What is your life expectancy based on health and family history?
  • When will you (and possibly a spouse) begin taking Social Security?
  • What other sources of retirement income/savings do you have?
  • How will your pension impact the amount of your Social Security benefit and tax bracket?
  • How will inflation erode the power of your earnings?

#3 – Not understanding that this is an annuity

Many people don’t realize that a pension is an annuity—a promise to pay a steady stream of income.  Annuities are a form of life insurance.  Pensions pay taxable income as long as the retiree is alive, or in the case of a survivor benefit, two lives.  Viewed in that context, why would you not compare the features and returns against privately-held FIXED annuities?  (As opposed to VARIABLE annuities, which work more like mutual funds and carry greater risk and fees.)  If a lump sum payout is possible, investing privately may return better yields.

No matter how your pension works, one thing is very clear.  Unless you fully understand the plan and how it impacts, and is impacted by, the rest of your financial life, you need help to find the best possible strategy.  An experienced, competent financial planner knows how to compare your options and lay the groundwork for a secure, comfortable retirement. Contact us to find out how to maximize your pension options before you retire. Once retired, there is no going back and changing your option!

Brian W. Bowen