By Jonathan Harner, CFP®
Imagine a moment…a moment you have been thinking about, dreaming about (perhaps dreading) for 20, 30, maybe even 40 years. You punch out for the last time, walk out to your car, and drive off the lot. It’s your last day of work.
Immediately, you are confronted with an overwhelming number of options. One in particular often feels like a black box: your pension.
It starts with a packet in the mail that looks as big as your engineering textbook, and stuffed with about as much jargon. As you flip through, trying to make sense of it, you think (but you’re not sure) there are a bunch of options for how to take your pension, but nowhere does it say anything about which one may be right for you in your situation.
Your sense of foreboding and overwhelm are compounding by the long-term implications. Once a pension decision is made, it locks you in for life—there’s no “saving your game” and starting again if you don’t like the outcome.
Thus, it’s crucial to carefully weigh your options and make the right choice for your individual circumstances. Personal specifics, like whether you’re married or single, your overall assets and debts, your retirement goals, and so much more, all play a part in making this decision.
While there are a number of decisions you’ll have to make when it comes to this excellent benefit, you don’t have to rely on breakroom gossip to make the right decision. Here are three key questions that can help you make the most informed decision.
To Take a Lump Sum or Annuity
The first significant decision point in your pension journey is whether to take a lump sum or opt for an annuity. (In this case an annuity just means a stream of ongoing payments.) It’s an enticing proposition to consider the lump-sum route and receive a significant sum of money, especially if you believe you could potentially garner greater profits by rolling it over into an IRA/401(k) and investing it yourself.
However, this viewpoint overlooks a vital component—giving up that guaranteed income for life. After running numerous calculations, I’ve found it to be quite challenging to achieve a return on investment that competes with the guaranteed income your pension offers. On the other hand, if you decide to take the lump sum and roll it over into an IRA/401(k), your pension is now part of your qualified funds and adheres to those rules, thereby exiting the traditional pension framework.
If you choose the annuity route, you open up a new set of choices around how those payments are structured.
Exploring the Annuity Options and Their Potential Impact
If you choose to receive the annuity, your options generally fall into three categories: single life, joint life, and period certain.
- Opting for a single life annuity means the pension stops upon your passing.
- Choosing a joint life annuity means continued payments until both you and your spouse pass away, with the percentage options usually ranging between 50%, 75%, or 100%.
- A period certain annuity guarantees payouts for a specified period, typically between 5 to 20 years.
Often, you can mix and match these options to cater to your specific needs and circumstances. For example, you might choose a single life option with a 10-year period certain, or a joint life option at 50% with a 5-year period certain.
It’s essential to remember that the highest monthly payout, typically associated with single life, doesn’t always equate to the highest total benefit. Even though the joint life option may result in reduced monthly benefits, the total payouts over both you and your spouse’s life expectancies could potentially exceed the total if you took the highest available monthly payout. If you do decide to choose an annuity option, it could play a key role in understanding your retirement lifestyle, as it gives you a certain dollar amount you can be confident in receiving for your life or your life along with your spouses.
Deciding the Right Age to Start the Pension
Another significant factor in your pension plan journey is determining the right age to initiate your pension. The option to start receiving pension benefits often becomes available from the age of 55, yet the benefits usually stop increasing after the age of 65. The waiting game plays a pivotal role in this decision, and, generally speaking, the longer you hold off, the better. However, this strategy is not one-size-fits-all and largely depends on your unique financial situation, and retirement goals (like how much income you need to be comfortable in retirement). Because of all these complexities, it is typically best to make this decision with the guidance of a CERTIFIED FINANCIAL PLANNER™ professional.
An additional factor to be aware of is the flurry of communications you may receive, particularly if you are no longer contributing to your pension due to separation from employment or other reasons. These messages may encourage you to roll over your pension into an IRA/401(k) and highlight the perceived benefits of such a move.
However, remember that if rolling over pensions were indeed more beneficial, why did many companies, including Spirit, discontinue the pension in the first place? As discussed earlier, I’ve run these calculations many times over the years, and have found that it is seldom in your best interest to roll over your pension into your IRA/401(k).
Confidently Start Your Retirement With Your Spirit Aerospace Pension
The decisions you make about your pension today can have a great impact on your financial future and overall quality of life in retirement. While this guide hopefully offers some key considerations for your Spirit Aerospace pension options, every person’s individual circumstances are unique—and what may be right for you may not be right for someone else.
Before making this critical decision, I encourage you to consult with a financial professional who can help you make the right choice. If you’re unsure of which choices to make to set yourself up for the retirement you want, I’d love to see if I can help. To get started, you can schedule a 15-minute intro call with me by contacting me at 316-722-1010 or jonathan@wichitawealth.com.
About Jonathan
Jonathan Harner is a CERTIFIED FINANCIAL PLANNER™ practitioner at Wichita Wealth Management, a fee-only, fiduciary financial advisory firm dedicated to helping their clients thoroughly prepare for retirement. Jonathan’s goal is to simplify the complex so his clients can experience confidence and peace of mind as they work toward and live out their retirement dreams. He specializes in developing and implementing tax strategies that maximize his clients’ money and builds a tax-efficient withdrawal plan for retirement. Jonathan loves finding opportunities for his clients to save money and is dedicated to continual learning and growing in his profession so he can provide solutions for his clients’ financial needs. When he’s not working, you can find Jonathan spending time with his wife, Annie, and their daughter, staying active in his church community, and participating in his two favorite (but vastly different) hobbies: CrossFit and Dungeons & Dragons. To learn more about Jonathan and how he can help you, connect with him on LinkedIn.