Strategies for Getting the Most from Your Pension

Despite what people say, pensions aren’t dead. For many workers – especially those nearing retirement today – a pension remains a key piece of the retirement puzzle. And like any retirement asset, it takes careful planning to maximize its value.

While most private employers have shifted to 401(k) plans, pensions are still alive and well in many industries. According to the U.S. Bureau of Labor Statistics, 15% of private-sector workers still have access to a defined benefit pension. Additionally, the U.S. Census Bureau reports that there are over 5,000 public-sector retirement systems across the country.

If you’re among those with a pension, you may face a critical decision upon retirement: Should you take your pension as a lump sum or as monthly annuity payments?

The right choice depends on several factors, and since there are no do-overs, it’s crucial to make an informed decision. At Advance Capital Management, we’ve guided thousands of retirees – including those from AT&T and the Federal Employees Retirement System – through these decisions.

Below, we explore key factors to consider when choosing between a lump sum or annuity pension, plus additional strategies to ensure you get the most from your pension.

Key Takeaways

• Choosing between a monthly annuity and a lump sum payout depends on your financial goals, risk tolerance and longevity.
• A monthly annuity provides guaranteed income for life, while a lump sum offers flexibility and investment opportunities.
• Understanding your pension’s eligibility requirements and potential tax implications can help maximize your benefits.
• Consulting with a financial adviser can provide personalized guidance to make the best decision for your retirement.

Choosing a Monthly Pension: Stability and Security

A monthly annuity pension provides a steady, guaranteed income for life. Your payment amount depends on factors such as years of service, salary, retirement age and survivor benefits.

Pros of a Monthly Annuity

• Guaranteed income for life – A monthly pension ensures you won’t outlive your money, providing a predictable income stream throughout retirement.
• No investment risk – Unlike a 401(k) or lump sum, annuity payments are not subject to market fluctuations, making budgeting easier.

Cons of a Monthly Annuity

• Limited survivor benefits – Typically, only your spouse can be named as a beneficiary, and they may receive a reduced payout (often 50%).
• No inflation protection – Most private pensions do not adjust for inflation, meaning your purchasing power could decrease over time.

The Lump Sum Pension: Flexibility and Control

Taking a lump sum means receiving your entire pension as a one-time payment rather than periodic payments for life. The lump sum amount is based on your projected pension benefits, interest rates and life expectancy.

Pros of a Lump Sum

• Investment flexibility – You can invest your lump sum in an IRA, tailoring your portfolio to match your retirement goals and risk tolerance.
• Greater control over withdrawals – Unlike an annuity, a lump sum allows you to access funds as needed.
• More beneficiary options – You can leave the remaining balance to your heirs or a charity of your choice.

Cons of a Lump Sum

• Investment risk – Managing your own retirement savings means exposure to market volatility.
• Risk of overspending – Without structured payouts, you must be disciplined to ensure your funds last throughout retirement.

Additional Pension Strategies

Beyond choosing between a lump sum or annuity, there are other steps you can take to ensure you’re making the most of your pension.

1. Make Sure You're Eligible for Full Benefits

Before retiring, check your pension’s eligibility requirements. Some plans require a minimum number of years of service to qualify for full benefits. If you’re close to hitting a milestone (e.g., 20 or 30 years of service), consider delaying retirement to maximize your payout.

2. Understand the Impact of Working Longer

Many pension plans calculate benefits based on your highest-earning years. If your salary has recently increased, working a few extra years could significantly boost your pension payout.

Additionally, delaying retirement may allow you to claim Social Security later, increasing your monthly benefit.

3. Consider the Impact on Your Taxes

A lump sum pension payout could push you into a higher tax bracket. Rolling the lump sum into an IRA can help defer taxes while allowing your money to grow tax-deferred. A financial adviser can help you create a tax-efficient withdrawal strategy to minimize your tax burden over time.

4. Factor in Other Retirement Income Sources

Your pension isn’t your only source of retirement income. If you have Social Security, a 401(k) or other investments, you’ll want to consider how your pension fits into your overall retirement income plan. For instance, if you have a strong investment portfolio, an annuity may provide stability. If you lack other assets, a lump sum could offer flexibility.

5. Evaluate Your Longevity and Health

Your health and family history should play a role in your decision. If you’re in good health and have a long life expectancy, an annuity could provide long-term security. On the other hand, if you have health concerns or a shorter expected lifespan, a lump sum may offer more control over your assets.

How a Financial Adviser Can Help

Navigating your pension decision isn’t easy, but you don’t have to do it alone. A financial adviser can help you:

• Assess your overall financial situation – Understanding your total assets, expenses and goals is key to making the right pension decision.
• Model different scenarios – Using financial planning tools, an adviser can compare potential outcomes of lump sum versus annuity options.
• Plan for taxes – Advisers help develop tax-efficient strategies to preserve your wealth.
• Ensure financial security – By evaluating your long-term needs, an adviser can help you avoid costly mistakes and make the best choice for your retirement.

If you’re nearing retirement and need guidance on your pension options, an Advance Capital Management financial adviser can help you explore your choices in a free consultation.

The Bottom Line

Your pension is one of the most valuable assets you have for retirement. Whether you take it as an annuity or a lump sum, the key is to make an informed decision based on your financial situation, risk tolerance, and long-term goals.

By understanding your options, maximizing your benefits, and working with a trusted financial adviser, you can feel confident that your pension will support the retirement lifestyle you envision.