The good news is you have a pension. According to the Bureau of Labor Statistics, 15% of private industry workers had access to a specified pension plan in 2024. And if you are close to retirement, you may be considering at what age to start the income or to take a payout. There are many factors to consider in your decision.
Inflation:
Pension income is usually level, meaning it doesn’t increase over time. Once you start the income stream at 65, it could be the same at age 85 unless your plan offers an inflation adjustment. As comforting as it may sound to have a guaranteed income for life, a dollar today will not be able to buy the same amount in 20 years.
Remember to consider inflation’s effect on your pension income, which may mean waiting longer to take the pension income, so you have a larger payout or explore a lump-sum option with more significant growth potential.
Pensioners should also consider their life expectancy and their spouse’s life expectancy when deciding how and when to take the income. The longer you or your spouse live, the more you may want to consider waiting to take the income for the higher payout.
Company/Employer risk?
Ben Franklin said, “The only thing guaranteed in life is death and taxes.”
Notice how he left out pension income? The guarantee is only as good as the company or pension association backing the guarantee. Most large pensions are supported by the Pension Benefit Guaranty Corporation (PBGC). However, there are limits to how much income the PBGC guarantees, and who is to say those limits won’t change?
But beware, carefully consider the risk that your pension may change, be bought out, or, worst case, go bankrupt.
Suppose you are concerned about your company’s financial viability and want to rely on something other than the PBGC. That’s a stronger case for taking a lump sum.
Other assets:
No decision is made in isolation. An individual with ample money in an extensive stock portfolio decided to forgo the lump sum and opted for the pension income. They reasoned they had enough of their portfolio at risk and wanted some guarantees in life. On the flip side, another individual took the lump sum and moved the tax-free asset to an IRA to ensure his two children would get the asset if he passed away. Pension income typically stops at the first death if a single-life payout is selected and the second death if the joint-life income option is selected.
Of course, there is much more to know, like how pension income compares to an annuity. Knowing your pension income ratio helps. It is worth remembering that increasing or decreasing interest rates can impact a pension.
While all pensions share some basic similarities, you don’t want to rely too much on generalities, blog posts, or an AI chatbot to guide you. There can be subtle differences between each plan.
And lastly, the decision is generally irrevocable, so you want to get it right. It’s best to have an experienced financial adviser review your pension terms and conditions and develop a customized game plan that considers your other assets, sources of income, financial goals, and risk tolerance.