Rarely does a week ago by that we don’t have someone ask, “Which option should I take with my pension?” or “How can I get the most out of my 401(k)?” Recently, Kristin and I met with a retired woman who preceded to describe what is probably the saddest story I have experienced in retirement planning.
Sarah and her late husband, Bill, were just getting ready to retire, and they decided to attend a dinner seminar sponsored by a local brokerage firm. They later met with the broker and explained that Bill must elect an option with his company pension. The broker advised that they take out a single life pension on Bill and purchase life insurance to protect Sarah. They filled out the pension papers and applied for the $1,000,000 life insurance policy. All seemed well, until the physical exam for the life insurance uncovered cancer cells, and Bill was now locked into a single life pension. The life insurance was declined, and Bill passed away less than a year later.
Sarah was left without a pension, but at least, she had Bill’s 401(k) of nearly $600,000 to see her through retirement. The broker suggested that a mix of stocks, bonds, and mutual funds would provide the extra income to replace Bill’s pension. After 16 years of withdrawing $2,000 per month and two market cycles later, Sarah now 76, has no pension and less than $100,000 remaining of the 401(k) retirement savings. The choices we make with our pension and 401(k) are some of the biggest financial decisions we will ever make. To ensure you plan for whatever may come, consider these common retirement mistakes:
- Not Protecting Your Spouse
There are many options for you to consider when it is time to claim your pension, including:
- Single life annuity (pays as long as you live)
- Single Life Annuity with a period certain (usually 10 or 20 years of guaranteed payments.)
- Joint life annuity (usually 25,50,75, or 100% options for your spouse)
- Lump-sum payment
If you are married, be careful when choosing the single life annuity option even though it will pay you the most now, because your spouse could end up without a pension benefit later. If you plan to purchase life insurance to protect your spouse, be sure that it has been approved and is in place before choosing your pension option.
- Taking a Lump-Sum Payment Without a Plan
When presented with the potential of taking a large lump sum, instead of a monthly payout, there are a lot of mistakes that can be made. Taking too much risk, paying off your house (which can create a large tax bill), buying new cars, or just not knowing how much you can use each month without running out of money are some of the potential pitfalls. This doesn’t mean that it is never a good idea, but it does require advanced planning.
- Claiming Your Benefits at the Wrong Time
Understand your company plan so you don’t miss out on benefits because you retired before the next lock-in or adjustment period (such as 25 years or 30 years of service). We assisted a woman three years ago, and because we understood the Summary Plan Description (SPD) and she waited an additional 18 months to meet a threshold, she is receiving an additional 20% in her pension for the rest of her life.
Interest rates can also have an impact on your lump-sum payment options. If interest rates rise, it takes your company less money to generate your lifetime pension. Therefore, the overall payment can be lower. If you plan to retire and are counting on a lump-sum payment in your planning, you need to take potential interest rate fluctuations into consideration.
- Not Safeguarding Your Pension
A company can make mistakes just like anyone else, so make sure the information that is being used to calculate your pension is correct. Here are a few tips:
- Obtain and review your Summary Plan Description (SPD) - the rulebook for your pension.
- Review your individual benefit statement and account information. Verify your accrued and vested benefits.
- Maintain a pension file. Keep records of where you have worked, dates of employment, salary, and any plan documents you have received.
- Notify your plan administrator of any changes that may affect your benefits (marriage, divorce, death of a spouse, etc.).
- Not Choosing or Updating Your Beneficiaries
We meet people almost every week that are surprised to find out that they have never chosen a beneficiary or have an outdated beneficiary on their 401(k). It is wise to review your beneficiaries on a regular basis.
- Not Maximizing the Company Match
If you are not participating in the portion of your 401(k) that your company will match, you are missing out on “free money.” In many cases, the match is the equivalent of a 50% or 100% return on your money. This should be the first priority in saving for your retirement.
- Listening to the Wrong People
Choosing your pension options or investing your 401(k) can be daunting. Many of us feel overwhelmed by these decisions and seek advice from others. Choose carefully? Our co-workers, neighbors, relatives, or bank employees may mean well, but do they have the expertise to guide you through these important decisions?
This can lead to poor decisions like owning too much company stock, investments inconsistent with your risk profile, or choosing the wrong pension option. It is vital that you seek guidance from an experienced retirement planner. You need to understand that the game changes the closer you get to retirement, and the risk that was appropriate at age 40 may not be appropriate at age 60. Be careful when choosing online resources – the Internet may be handy, but it can also be unreliable. There is no substitute for solid advice from those who have successfully guided others in making good decisions.
Originally Published on CNN Money in 2016
Investment advisory services offered through Claraphi Advisory Network, LLC., an SEC-Registered Investment Adviser. Insurance and annuities offered through Legacy Wealth Partners. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.