Mark and I have talked over the years about the importance of making a pension choice correctly the first time. In almost every pension, a retiree only gets to make the choice once. Once the choice is made it is final, no changes can be made. Yet, right now for nearly 42,000 GM retirees they are getting a chance to make a second choice, a pension “do over” if you will. GM retirees in the GM Salaried Retirement Program only have till July 20 to take advantage of this offer. So here is what those retirees and in fact anyone who may be eligible for a pension should know.
There is no one right choice for all retirees when it comes to picking a pension option. Everyone wants to give a retiree advice and I’m sure in most cases everyone is trying to help. Yet, it doesn’t matter what your poker buddies think, what you heard on TV that ALL retirees should do, what your brother in law who used to be an accountant said, or what the old boss thinks is best. You need to run your own numbers before a decision is made. So our first piece of advice is to slow down and get educated on what makes the most sense for you and your family after the numbers are run by an unbiased professional who specializes in retirement distribution planning.
Here are the basics on what needs to be considered on choosing a pension option:
- What is the age of the retiree? Assuming the retiree elects a lump sum rollover, different IRA rules apply to those younger than 59½ and those older than 70½.
- Are there other sources of income the family has and what are the monthly income needs, now and in the future? The lump sum pension gives the account owner a lot of flexibility to payments. But watch out: Spend too fast and the lump sum could run out.
- Are there other investment assets? In some cases it may be better to pull money from other accounts first and let the tax-deferred account continue to grow.
- How much income should be protected for a surviving spouse? Don’t forget about other potential losses of income like one of the Social Security incomes.
- What is the health of the retiree and his/her spouse? It is also important to take steps to protect the lump sum pension for a health care crisis.
- What are the family’s wishes to leave assets to children or others beyond the spouse? Most traditional pensions focus primarily on the retiree, with survivorship options, but can leave other wishes out.
- Does the retiree want more control over their retirement funds? If a monthly payout is selected, usually access to the lump sum is gone forever.
- What is the risk tolerance? The stock market can be risky and most fixed investment rates are at decade-level lows, so finding the right mix can be tricky if investing isn’t an area you are familiar with.
- What is the expected return on money? We recommend that conservative numbers be run, 3 percent to 6 percent.
- Who should manage the lump sum pension? To avoid a potential 20 percent tax trap you will need to rollover the money and open an IRA with a custodian. Then you will decide what to buy or hire an investment professional to help out.
Once a retiree takes a look at these top 10 pension questions, then the math can be run and a plan can be created to figure out if a lump sum pension or a monthly payout is the best choice. Making a pension decision is an extremely important choice in securing a long and happy retirement and often the choice isn’t as easy as it may seem. Take some time to get educated about how the various choices apply to your own family’s situation. It never hurts to get a second opinion. Don’t assume what everyone else is doing is right for you.
For more information about The Retirement Guys, tune in at 1 p.m. Saturdays on 1370 WSPD or visit www.retirementguysradio.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., member FINR/SIPC. NEXT Financial Group Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Dr., Suite 100, Maumee OH, 43537. (419) 842-0550
