If You're Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do
Pensions are becoming a thing of the past — so if you're still entitled to one, consider yourself lucky. Once you have a pension, however, what will you do with it? How will you manage it? Here are a few suggestions on how to handle your well-earned windfall.
1. Request an Updated Pension Statement Annually
Call me crazy, but I check my bank account every morning when I wake up. It's all still there each day, but I don't like to take any chances. You need to keep an eye on your pension, too. Granted, you don't need to check in every day, but you should request an update once a year.
"Like your Social Security benefits, your pension benefit amounts can change," explains Brannon T. Lambert, owner of the investment firm Canvasback Wealth Management. "Not only that, but pensions can have several options for payouts, survivor benefits, or cash out options. You want to know every option available to you especially if you are married or have dependents."
2. Weigh Your Payout Options Carefully
Before the IRS passed a law in 1978 to make self-funded 401Ks possible, many companies provided employees pensions — a fund that accrued in value over time to ensure that their employees were at least modestly supported through their retirement. That's all but reversed nowadays. In 1979, 28% of all workers were enrolled with pension plans, whereas only 2% of today's workforce is enrolled. Conversely, between 95% and 98% of employers offer 401K plans. Go figure.
When it's time to receive your pension, the first decision you'll need to make is how you want to receive the money— which, in turn, raises many important questions. Morgan Christen, CFA at Spinnaker Investment Group in Southern California, explains your options.
"Pension planning involves many decisions that are irrevocable; anyone that will receive a pension should learn about all of the payout options," he says. "Do you want to receive income for your life? Do you want to make sure a spouse is covered should you pass away? If you want to cover a spouse, how much of your benefit do you want that person to receive — 100%, 75%, or 50%?"
These are all things to think about when it comes time to take your pension. Keep in mind that if you want to cover a spouse, you will be taking a reduced amount on a monthly basis — and if your spouse predeceases you, you may not be able to change course.
3. Investigate the Social Security Offset Provisions
You may expect a certain dispersed dollar amount each month when your pension begins, but you could be caught off guard if it changes down the road. Your Social Security payments may be the culprit.
"Some pensions come with Social Security offset provisions," Lambert explains. "This means that your pension benefit amount could be one dollar figure initially, but once Social Security benefits begin, your pension will be reduced somewhat depending how much they offset. It could possibly be dollar-for-dollar up to a preset limit. This can come as a big surprise if you are not aware of it."
4. Research Your Investment Opportunities
If you want to roll the dice with your pension, that's your prerogative — but you need to go into any investment situation well-informed of what you're getting into. This is money that needs to last the rest of your life, and you don't want to squander it because of poor decision-making. Do you research and get level with expectations so you're not blindsided by bad news.
"When it comes to pensions, many people assume that the managers of the funds will do the investment on behalf of the participants, which is rarely true," says Justin Kumar, senior portfolio manager at investment firm Arlington Capital Management in Arlington Heights, Ill. "Participants must elect their investment options from the lineup of available funds, but if they do not, they will often be invested in the default option. The problem is that the default is usually some type of cash or money market equivalent funds. Although these funds may be a safer option, they will not participate in market uptrends, leaving participants confused at the end about why they may not have more money."
Furthermore, for those participants with limited investment options, there may be language in the pension plan documents that specifies an age — such as 55 or 59 1/2 years old — in which pension funds can be rolled over by a participant into an IRA, thus allowing access to a greater universe of investment possibilities. Participants should consult with their pension consultants and perhaps with an outside adviser to determine the best course of action when making these investment decisions.
5. Avoid Greedy Financial Advisers
How do you know if a financial adviser has your best interest at heart? Mark Zoril, founder of the retirement-planning firm PlanVision, reveals how to spot the con artist.
"As someone evaluates and reviews their options, it is important to understand the pros and cons of taking the pension or transferring it to an IRA," he says. "Unfortunately, far too many advisers' compensation is directly impacted by what someone does with their pension. Therefore, they are strongly incentivized to convince people of the benefits of cashing out their pension. In fact, a transfer from a pension can be a very strong payday for an adviser."
This applies to so-called "fiduciary" advisers as well.
"Many of these advisers promote how they are 'fee only' and offer objective guidance," Zoril adds. "However, if they charge their clients based upon assets under management — the most common model of advisers — they have a huge conflict of interest in providing guidance on this particular topic."
It's important that you seek the guidance of a professional — perhaps someone you know well in that field, and not someone who's blinded by your potential investment — regarding your pension plan to fully understand whether or not the advice you're seeking will be influenced by their adviser's compensation. This presents a real risk to your evaluation process.
6. Plan for the Taxes You're Required to Pay
Your pension is not tax-free. It will be taxed as regular income. You need to plan and save for that bill so you stay in good standing with the IRS. You don't want to spend your golden years in the slammer, do ya?
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