Pensions are an endangered species.
Recent years have seen employers ditching defined benefit pension plans in favor of less generous retirement plans, such as 401k programs.
If you are one of the few who currently receives a pension, consider yourself very lucky. Then ask yourself some important money management questions. Like, what will you do with your pension? How can you maximize your plan’s financial impact?
Here are six tips for managing your pension to get the most from this increasingly rare retirement benefit.
1. Understand and Weigh Investment Opportunities – Pension participants who don’t elect their own investment options usually find themselves invested in the default options. While these funds may be a safer option, they won’t prove as advantageous in market uptrends. The result? Default investment participants often end up wondering why they don’t have more money.
This is where an investment in time can really pay off. Consult with advisors provided by the pension, or an outside advisor, to determine your best course of investment based on your needs, goals and risk tolerance.
2. Carefully Consider Your Payout Options – The first decision you’ll need to make when it’s time to receive your pension is how you want to receive the money. Because this initial decision is often irrevocable, it’s crucial to be smart from the outset. Begin by educating yourself on all the payout options.
For instance, many pension recipients want to make sure their surviving spouse still receives income after the pensioner dies. A spouse can receive the full pension amount or a percentage. Remember, if you make an allowance for a spouse, you may end up with a reduced monthly payout for yourself. And if the spouse predeceases you, you may not be able to modify your original decision.
3. Educate Yourself on Social Security’s Offset Provisions – Offsets by Social Security? That’s right. Some pensions come with Social Security offset provisions. Your pension benefit could decrease once you start drawing Social Security. This offset could be as much as dollar-for-dollar up to a preset limit. This takes many retirees by surprise. So read up on your pension provisions to see how your benefit will be affected.
4. Plan for Taxes Ahead of Time – Unfortunately, taxes don’t end just because you stop working. Your pension is not a tax-free payout; it’s taxed as regular income. So it’s wise to be prudent and save for your tax bill so you’re not in hot water with the IRS come April 15th.
5. Choose Your Financial Advisor Carefully – Some investment professionals receive incentives for steering clients in a particular investment direction. For instance, a transfer from a pension can spell payday for an adviser, but it may not be the best option for you.
It’s important that you seek the guidance of a professional. It’s equally important that this person is not blinded by what they can get out of your investment strategy. So shop around. When meeting with a potential advisor, get to the root of whether the advice you’re seeking will be influenced by their compensation.
6. Request and Review an Updated Pension Statement – Raise your hand if you’re like me and check your bank account daily. It’s something I’ve made a habit, just to make sure there’s nothing unexpected. Along these lines, you should keep an eye on your pension statement.
You don’t need to check in every day. But you should request an update once a year. Just like Social Security benefits, pension benefit amounts are subject to change. Additionally, pensions can have several options for cash out, payouts, and survivor benefits. You’ll want to keep an eye on your options, especially if you’re married or have dependents.