Your pension, your legacy: Making the most of what you’ve earned

By Paul Gaudio

Are you relying on a pension as a key part of your retirement strategy? If so, it’s essential to review the following important considerations to help ensure you’re making the most of your benefits and optimizing your retirement income.

1) Understanding Your Plan. Have you requested an illustration of your pension plan payout from your employer? Do you know by what percentage your pension payment increases by each eligible year of service? Does your plan offer a cost-of-living adjustment in retirement?

a. Payment Amount. A lot of pension plans structure their payouts based on a percentage of your salary. For example, your pension payout could be based on x% of your average last five years of salary.

b. Payment Cap. Some plans will cap your maximum pension payout to x% of your salary.

Here’s an example:

Ted has worked for a state government agency for over 30 years. Ted is currently eligible for a pension worth 70% of his average salary over the past five years. If Ted works another 10 years, his pension benefit would increase to 80% of his average salary over his last 5 working years.

After 40 years of service, Ted’s pension payout is capped at a maximum of 80% of his last five years ' average earnings. While Ted’s average salary may increase after 40 years of service, his pension benefit will not increase beyond the 80% cap.

Make sure you understand your plan’s benefits so that you can maximize payout!

2) Understanding Your Payment Options. Many clients I have worked with are surprised to see the range of payment options available to them when choosing to elect their pension. Typically, you will have several payment options to choose from when electing to start your pension. Let’s go through some of the most popular options:

a. Single Life. This payment option typically offers the highest payment amount because it is solely based on the participant's life expectancy, hence “single life.” The risk of electing this option is that if you pass away early in retirement, your payments will end, and your family will not receive any more benefits from the pension.

b. Joint Life. This payment will continue for the participant’s life, as well as their spouse’s life, and is offered at a discount to the Single Life Option because the payment will have to cover two life expectancies instead of one.

c. Period Certain. Sometimes, companies will add a “Period Certain” to the list of options. For example, Single Life with 10-year Period Certain. This means that payments would be based solely on the participant's life but would payout for a minimum of 10 years.

Jim chooses to elect Single Life with 10-year Period Certain option on his pension. Unfortunately, Jim passes away from a heart attack one year into his retirement. Jim’s pension payment will continue for the next nine years to the beneficiary he chose when submitting the pension paperwork because he chose the 10-year period certain option. After the initial 10 years, payments will cease.

These are just a few of the payment options plans can offer, and making the correct decision can have a profound impact on a successful retirement.

The right financial advisor can help you navigate this process and determine an option aimed at maximizing your benefits. You have worked so hard to obtain this pension, make sure you take the time and effort to choose the right option for your situation.

Paul Gaudio, CFP® professional, is a client advisor for Crestwood Advisors. He has a passion for helping people make smart choices with their money and building a roadmap to help them accomplish their goals.