If you're lucky enough to have a pension from an employer, it makes sense to get the maximum possible benefit out of it. And one way to do so is by selecting the best payout option for yourself and your family.
Taking a lump-sum payout means you'll get a single, large sum of money as soon as you retire -- and that's the end of your pension. The lump-sum option gives you maximum control of your money, as you can then decide what to do with it instead of leaving it up to the pension people to manage it for you. Unfortunately, retirees who choose this option tend to overspend their lump sum, leaving them without sufficient funds later in retirement. So if you choose the lump-sum option, roll it into an IRA or another retirement account, rather than tucking it into a standard brokerage or bank account. That will help remind you to keep your sticky little fingers off the money that's supposed to last your entire lifetime.
Single life annuity
If you're not taking a lump-sum payout, then you'll be getting some form of annuity instead. An annuity is a product that pays you over time, though different annuities set their payments in different ways. Most pensions will pay you with some form of fixed annuity, meaning that whichever payout option you choose, the payments you receive will be exactly the same each month.
A single life annuity is the simplest type of pension annuity. It generally provides the largest monthly payments of all the annuity options, but as soon as you die, the payments stop coming -- even if you die immediately after signing up for the annuity. That could leave your family in dire financial straits if they don't have other sources of income.
Joint and survivor annuity
A joint and survivor annuity gives you a way to protect your family after you're gone. This annuity pays you as long as you live, and then continues to make payments to your chosen beneficiary (typically a spouse) throughout their lifetime as well. Most joint and survivor annuities allow you to choose what percentage of your lifetime payments your beneficiary will receive; options commonly range from 50% to 100%. Of course, the higher the percentage you select, the smaller your base monthly payment will be. It's best to look over all the results produced by the various options and choose the one that will maximize your lifetime payment while still ensuring that your family will have enough income from your survivor benefits to get by without you.
While the joint and survivor payout option keeps the payments coming through both yours and your beneficiary's lives, the period-certain option continues to pay until your death plus a certain number of years afterward. The payout period options for your beneficiary will typically range from five to 20 years. Because the number of payments your beneficiary will receive are limited under this payout option, you'll typically end up with a monthly payment that's smaller than the single life option but larger than the joint and survivor one.
Choosing the right pension payout
For most retirees, an annuity of some type is a better choice than a lump-sum payout. Annuities provide a fixed, guaranteed source of income for at least your lifetime and possibly beyond, which can be a lifesaver if something bad happens to the investments in your retirement savings accounts. A pension annuity, when combined with your Social Security benefits, may be enough income to guarantee that you'll always have enough to get by, no matter what.
Single life annuities make the most sense for someone who's single with no underage kids, or whose family has ample income from other sources. A single life annuity may also be a good choice for a retiree in excellent health who expects to have a long retirement. Joint and survivor annuities provide the best protection for your spouse or other beneficiary, while period-certain annuities may be the best option if you don't have a spouse to support but want to make sure that your kids will have a source of income in the years following your death.
Before making a decision about which pension payout option to choose, be sure to consult with your spouse and probably your kids as well. This is a decision that will affect them as well as you, so it's only fair to at least hear them out before you decide how you want to claim your money.
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