Comparing the choices for your defined benefit/pension payout may help you figure out how to reach your retirement goals.
Quick takeaways
If your retirement income plan includes a
Every pension plan has its own payout formula. It’s typically a combination of length of service, salary, and age or date you choose to receive your first payout, or the benefit start date. (You can find all these details in what’s called a summary plan description, a document provided with your pension plan.) Check out this explainer on
You can also request an estimate of your pension payout options (sometimes called a benefit estimate) from the plan provider or your company’s human resources department. A benefit payout estimate typically includes both payout options and the value of those options based on when you want to receive your benefit payout.
If you have a pension that is serviced by Principal®, your individual dashboard offers helpful details on your plan. Here’s how to access them:
Log in to your account from any page on Principal.com; look for the blue button on the upper right-hand corner.- On the left-hand side of your dashboard, look for the “defined benefit” card; click on it.
- To find your summary plan description, click on “Overview” in the top menu, then scroll to “Plan information and forms.”
To run an estimate of your benefits, click on “Estimate benefits” in the top menu, then scroll to “New estimate.”
Of note: Your defined benefit plan may actually be a nonqualified deferred compensation benefit. If so, look for the “nonqualified defined benefit” card. You’ll only be able to view the statement and account details and cannot run benefit estimates for these plans.
You can typically choose one of two options for a pension payout, but some plans may allow you to choose a combination. They include:
- Annuity: monthly payments of a fixed amount over a predetermined time span; some plans may only offer an annuity option.
- Lump sum: a single payout of your entire available benefit. Plan provisions determine where they can be deposited and what taxes may apply.
For some, the appeal of an annuity is certainty: It’s a fixed, regular payment made to you each month, no matter what. It’s almost like you’re replacing a portion of your pre-retirement paycheck. You may also be able to add options, called riders, that help planning for joint benefits for you and a spouse, for example, or for your survivors.
The specifics of your employer’s plan may vary, but in general, an annuity may have three payment options: life annuity, life annuity with certain period (simply the guaranteed number of years payments continue), and survivorship annuity. Both period-certain and joint and survivor payouts are lower than single-life payouts because they’re typically made over a longer payout period. Here’s how they compare:
A lump sum payout, if offered by your employer’s plan, is just a single payment equal to the entire current value of your pension benefit paid all at once. With this option, you don’t receive a consistent amount each month. Instead, you must manage this lump sum and determine how and when to spend it.
What you can do with the money from a lump sum payout depends on the specifics of your employer’s plan. In general, you may be able to:
Thinking through whether you should take a lump sum payout or annuity isn’t just about an amount. Your health and your spouse’s health, future expenses, and lifestyle may influence your decision. Keep in mind: An annuity can provide years of retirement income certainty, while a lump sum offers a single payment. A financial professional can help talk through different options and what may work best for your retirement goals and savings.
Your pension plan dictates when you can take your pension payout. Many plans allow payouts to begin at a traditional retirement age like 65; you may see this referred to as the plan’s normal retirement age. It’s simply the age when you can take your full retirement benefit.
However, you may be able to defer taking the payout until a later age, or take it at an earlier age like 57, called early retirement age. (If you take an early payout, you may receive your benefit for a longer period of time, so this choice could reduce the payout amount.) Finally, some plans may require a certain number of years of service before you are eligible for a payout. Check with your plan provider or human resources department for specifics about your options.
If you have a pension plan with services at Principal, log in to check the specifics of your payment options, see benefit estimates, and compare the payment amounts and options. Or, see how Principal can help you boost your retirement savings through tools such as an
