In February 2009, we presented at the Ohio Education Association Megaconference in Cleveland. Our presentation focused on the topic of choosing the right pension options for Teachers approaching retirement. Senate Bill 5 and several industry changes make this topic worth a revisit. Even, if you have no clue about Senate Bill 5, or aren’t involved in the Teaching profession, choosing the wrong pension option can be costly. Let’s educate you on the various choices.

No one option is right for everyone! Let me repeat that, just because the boss, the accountant, or someone on TV said “every retiree should …” doesn’t mean that option is right for you and your family. Don’t make these decisions lightly. Once a retiree selects a pension option and starts receiving money, the decision normally becomes irrevocable. Education starts with attending a group session if it is offered. Then sit down and talk one-on-one with a representative from the company that deals with the pension plans to review individual choices. Finally, get a second opinion from an investment professional who doesn’t work for the company where you are employed.

I know; I know three or four meetings might seem like a lot of homework, but trust us, putting time in now could be a smart investment.

Pensions are mainly broken down into two categories, lump sum or monthly payments, or a combination of the two called Partial Lump Sum Option Plan (PLOP). When a retiree selects a lump sum option, that investor is taking personal responsibility for managing their money. Invest wisely and it can pay off, yet if a retiree spends too quickly or the investments lose value, watch out, the money could be gone. Monthly payments options are when the retiree usually allows the company to keep the principal balance of the pension in exchange for an income for the rest of their lifetime.

Live a long life and work with a financially sound company and it can be a good option for a “set it and forget it” retirement plan. The Pension Benefit Guaranty Corporation, a U.S. government agency, details information at www.pbgc.gov.

Monthly options are often broken down into different payment choices for various periods of time, and can include survivorship options. Several factors should be considered to figure out what is right for a retirees and his or her family. First, how is the health of both the retiree and the spouse?

Sometimes personal life insurance can be purchased for less cost to protect the spouse versus selecting the lower survivorship option. Since insurance underwriting can take a few months, make sure everything is in place prior to assuming the insurance option will work out. Protecting the income for a set number of years can also be an important choice. This could come in handy if a spouses is younger and the goal is to protect them until they reach full social security or retirement age, when they might have their own pension to draw from. Each choice will end up coming down to what is important to the retiree’s own financial situation.

Lump sum payment options are available in some of the pension plans. This is when a formula is used to determine an upfront payment. This money is normally transferred into an IRA and invested as the retiree sees fit. The paperwork must be filled out correctly or distributions can be subject to a mandatory 20 percent tax withholding and to make matters worse, if the person is under the age of 59-and-a-half it could also be subject to an additional 10 percent withdrawal penalty. Important tax issues should be discussed with an accountant. Lump sum options can make sense for investors who feel comfortable making their own investment decisions. It can also be a good option for a family that has other resources to provide monthly income, or for those who want to have the possibility of leaving a bigger legacy to their family or loved ones. Just be sure to fully understand the impact of lump sum distribution and your personal responsibility.

Our mission is to educate all Americans on how to be financially self reliant. Choosing the correct pension option the first time is one of the most important decisions of a retiree’s lifetime. Remember to plan ahead and plan early. Do the homework and spend a little time to fully understand each and all of the options before the paperwork gets turned in. Sure, it takes effort and work on your part, but do the work now, so you don’t have to go back to work later. This is your retirement, no one else’s, and what is right for someone else, may not be right for you and your family. O

For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysradio.com.  Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  NEXT Financial Group, Inc nor its representatives provide tax advice.  The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. (419) 842-0550.

Tags: Senate Bill 5, The Retirement Guys

This entry was posted on Friday, April 29th, 2011 at 8:56 pm and is filed under Retirement Guys, Toledo Business Link.
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