By FPA member Mike Bonacorsi, CFP®
Last Updated: April 19, 2010
If you are considering retirement, you might be concerned about how you will replace the income check you have been receiving for the last number of years. If you are lucky enough to have an employer that still has a defined benefit plan in place, you will have several payout options available to you. The payouts are calculated as an income stream over a single or joint life expectancy.
At first glance, a straight life payout may appear to be the most attractive choice because it pays the largest benefit. The benefit is calculated on a single life and will end at the death of the recipient, with no benefit available for the surviving spouse. This benefit might be appropriate for a single retiree or a couple with enough assets or insurance to cover the loss of income through the survivor's lifetime.
Survivorship benefits will pay a reduced lifetime benefit to the retiree with the promise of a continued benefit if survived by a spouse. Payments are paid as a percentage of the available benefit (50 percent, 66 percent) to the retiree with the remaining benefit (50 percent, 34 percent) continuing to the surviving spouse. The consideration again is whether or not there are enough assets available to provide the survivor with adequate income.
A third option available in some plans is a lump-sum distribution that can be rolled over to an Individual Retirement Account (IRA). This option will allow you to invest your assets while continuing to defer taxes, flexible distribution options subject to Required Minimum Distribution (RMD) rules, and the ability to choose beneficiaries beyond a spousal survivor. Of note, in choosing the lump-sum option, you run the risk of not necessarily being able to generate enough income for life, as you would with either a straight life payout or joint and survivor payout.
FPA member Mike Bonacorsi, CFP®, is a public speaker and award-winning author of "Retirement Readiness: A Guide to Creating Your Vision, Knowing Your Position, and Preparing for Your Future."