Life Events

If you have worked for an employer that offers a pension, you may be entitled to a monthly payment in retirement. Knowing what you are owed, and what choices you will face, helps you plan with confidence.

Types of plans

• Defined benefit plans promise a specific monthly benefit, usually based on your salary and years of service.
• Defined contribution plans, such as 401(k)s, depend on contributions and investment results rather than a promised amount.
• Cash balance plans are defined benefit plans that show your benefit as an account balance.

Key terms to learn

• Vesting: how long you must work before you have a nonforfeitable right to your benefit. Federal law sets maximum vesting schedules for most private plans.
• Normal retirement age: when you can receive the full benefit.
• Early retirement: many plans allow earlier payments at a reduced amount.
• Service credit: how years of work are counted, including breaks in service.

Know your rights

Private-sector plans are generally governed by the federal law known as ERISA. It requires plans to give you a summary plan description, an annual funding notice for defined benefit plans, and benefit statements on request or on a regular schedule. You can ask the administrator for your accrued benefit and vesting status in writing. Plans have procedures for appealing denied claims, and the deadlines are short.

Finding a lost pension

If you worked for an employer that closed, merged or moved, you may have a benefit you have forgotten. Look through old paperwork, contact former employers and ask the plan administrator. Government-sponsored tools and the Pension Benefit Guaranty Corporation can help locate benefits from terminated plans.

Payout choices

1. Monthly annuity for life, single or with a survivor benefit for your spouse.
2. Lump sum, if the plan allows it, which you can roll over to an IRA to avoid immediate tax.

Each choice has trade-offs involving longevity, investment risk, inflation and your spouse's needs. Many pension decisions are irreversible.

Divorce and survivors

Pension benefits may be divided in a divorce through a court order known as a qualified domestic relations order. Spouses generally have survivor rights, as described in our article on survivor benefits.

Taxes

Pension payments are generally taxable as ordinary income, except for any portion that represents after-tax contributions you made. You may need to adjust your withholding. See irs.gov for current rules.

Before you make a retirement payout decision, contact our office and we will help you compare your options.