Making Your Retirement Stream Last
Get Familiar with Your Choices
When it is time to retire, your company's retirement plan will offer you several ways with which to start collecting your retirement benefits. The payout option you elect is probably one of the most important decisions you'll ever have to make. That's because your decision is irrevocable. Although retirement may be more than just a few years away, understanding your options can be helpful in your planning.
With a defined benefit plan, your employer may give you a choice of a fixed monthly payout, known as an annuity, a lump sum you can invest on your own, or a combination of both. With a defined contribution plan, you may be able to 1) "annuitize" your total investment and receive a fixed monthly income, 2) leave it in the plan until you need it (at least until age 70½), 3) take it as a lump-sum distribution and report it as taxable income in the current year, or 4) defer taxes by rolling it over to a traditional IRA, or rolling it over to a new employer's plan. You can postpone distributions from your retirement plans (but not from your traditional IRA) if you are still employed by the plan sponsor, even if you are older than 70½ (this does not apply to you if you are a 5% owner). Distributions from a Roth IRA can be postponed beyond age 70½, whether you are employed or not. In order for you to decide which is right for you, you need to understand how the basic payout options work.
An annuity basically provides a fixed income to you over your lifetime or a fixed period of years. Here are the most common annuity payouts:
Look at the table below to see how the various monthly annuity options compare:
*J&S - Joint and Survivor
(Assumes the employee is age 65 and spouse is age 62 when annuity payments commence. Payments under your plan in your personal circumstance may be more or less.)
A lump sum distribution is an amount of money you take as a total payment of your benefits. You will be required to pay taxes on the lump-sum distribution unless you decide to roll it over to a traditional IRA or another qualified plan. If your defined-benefit pension plan allows you to take a lump-sum distribution, the amount you receive represents the present value of all future benefits. If you elect to receive a lump-sum distribution, neither you nor your beneficiary will receive any further payments.
There are several factors you will need to consider when making the decision between annuity and lump sum, including what other assets you may have and how comfortable you are managing your own money. If you leave your job before you retire, you should plan on moving your retirement plan savings. And if you need to make an early withdrawal, you need to do some work to minimize any financial penalties.
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Securities and advisory services are offered through Santander Investment Services, a division of Santander Securities LLC. Santander Securities LLC is a registered broker/dealer, Member FINRA and SIPC and a registered investment advisor. Insurance is offered through Santander Securities LLC or its affiliates.