Back By Popular Demand: What’s the Best Payment Option?

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LAGERS offers several retirement payment options for you at retirement. And, believe it or not, there is not one option that is better than the other. In fact, the payment options themselves are designed to ultimately pay the same total amount to you or your beneficiary once both of you have passed away. That fact does not really help you make the decision as to which payment options you will choose. Because, while there is no better option than the other, there is an option that may better fit your needs in retirement. Here are some things you should be thinking about when determining which payment option you will choose.

Does my spouse have a pension of their own? Sometimes, both spouses have a pension. When considering your payment option, consider what retirement income your spouse will be receiving from his or her own pension. Depending on the circumstances, this may lessen the need for you to provide a monthly benefit for your spouse. Option A and Option B are joint survivor options that offer varying amounts payable to a spouse. For example, my wife is a public school teacher and if she works her entire career as a public school teacher will have a significant pension benefit when she retires. This may dictate the payment option I choose in retirement knowing that she will have her own pension income.

Do I want to provide for my children? Currently, there are a few options that allow for a non-spouse to receive a monthly benefit Under Option A and Option B, the beneficiary must be a spouse of two or more years or a person who is 40 or older and has received more than half support from you for two or more years. Also, Option C allows you to list someone other than a spouse as a beneficiary. Another way to provide for your children is through the Partial Lump Sum (PLUS). If you choose, the funds from the Partial Lump Sum can be directly transferred to a qualified retirement account (IRA, 457, 401, etc.). Once the funds are transferred, you can set your beneficiaries of the qualified account to also include your children. This is a way for you to leave a legacy to your children and / or grandchildren.

I don’t have a spouse or any children, what options do I have? As a single person, you have two options available to you. You may choose the Life Allowance which pays you the highest monthly amount and when you pass away nothing else is payable unless you have employee contributions remaining. If so, the employee contributions will be refunded to your beneficiary of record or your estate. The other option is Option C. It is the only option that pays a monthly benefit and allows you to list whomever you choose to be the beneficiary.  This would include a trust or charitable organizations.   And remember, you may be able to choose Option A or B if you are financially supporting another person that is at least age 40.

What if my spouse significantly younger than me? If you are choosing a spousal option, there are additional adjustments to the member’s benefit based on the age difference between you and  your spouse. Option A and Option B both have additional reductions to compensate for the spouse being younger. However, your younger spouse will still receive a benefit for their lifetime upon your death. So, you might think that the additional reduction is well worth a lifetime spousal benefit.

Can I take a piece of the partial lump sum to pay off my mortgage? One quick way to receive a sum of money to pay off unpaid debt is the Partial Lump Sum. However, you can’t receive just a portion of the lump sum. Also, if you receive the lump sum and deposit it into a checking account, it is fully taxable. So, if you need only a portion of the lump sum, you could choose  a direct rollover of the funds into a qualified retirement account. Once the lump sum has been transferred, you may withdraw only what you need from the account to pay off your mortgage. That way you are only taxed on the funds you withdraw and not the entire lump sum. Keep in mind, that when you withdraw from your qualified retirement account, the funds have the taxation characteristics of that account and your withdrawl will be subject to those characteristics. So, before doing anything like this, you should seek advice from a professional accountant or CPA.

As you can see, there are several different scenarios that could play out and several more that were not illustrated here. Bottom line: there is not one option that is the best. However, there may be an option that fits your needs better than the others. So, do your research, attend a seminar and make an educated decision.

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Jeff Pabst, CRC Senior Communications Specialist

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