Comparing the choices for your defined benefit/pension payout may help you figure out how to reach your retirement goals.
Quick takeaways
- Your options for a pension payout, including when you’re eligible to start receiving a payout, are determined by your organization’s or former organization’s plan.
- Plans may include either a consistent monthly paycheck or one-time lump sum payment, if allowed by your plan.
- Additional details, such as if you’re able to provide payments to a surviving spouse or beneficiary, are worth considering as you think about options for your pension payout.
If your retirement income plan includes a defined benefit plan (also commonly referred to as a pension plan), you’ll have choices to make to determine when and how much you receive. Here’s how to get started and figure out what works for you and your retirement budget.
How will my pension payout amount be calculated?
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.)
Tip: Check out this explainer on must-know terms for defined benefit plans.
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.”
What are the types of pension payouts I might have?
You can typically choose one of two options for a pension payout, but some plans may allow you to choose a combination:
- 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.
Why consider an annuity?
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:
| Payment period | Spousal consent required (if married) | Payable to survivor | Taxable | Example of monthly amounts |
|
|---|---|---|---|---|---|
| Life annuity | Your lifetime | Yes, your spouse must consent to not receiving any benefit payouts from this plan. | No | Yes | $100 |
| Life annuity with certain period | Your lifetime. If you die during the preselected period these payments continue to a spouse or beneficiary until the period ends. Periods typically last 3-10 years. | Yes, your spouse must consent to receiving payouts for this preselected period of time or if you designate a different beneficiary to receive these payments. | Yes, if you die during preselected period. | Yes | $97 (10-year certain period) |
| Survivorship annuity | Your lifetime. You choose a percentage of that income such as 50%, which goes to your beneficiary for the rest of their life. |
Depends on options selected. |
Yes, a preselected percentage of the amount receiving will go to a survivor for their lifetime. | Yes | $92 (50% joint and survivor so $92 until you die, and then your survivor would receive $46 after your death for their lifetime. |
Why would I consider a lump sum payout?
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:
| Taxes and other fees | Potential for market growth | |
|---|---|---|
| Roll the funds to a new or existing IRA | As long as you meet age minimums, taxes are deferred until you begin withdrawing funds. | If you don’t need the money immediately, there may be opportunity for growth potential. |
| Roll the funds into a qualified retirement plan like a 401(k) | As long as you meet age minimums, taxes are deferred until you begin withdrawing funds. 401(k) rollover fees could apply, and the plan must accept rollovers of this kind. Check with your provider for specifics. | If you don’t need the money immediately, there is opportunity for growth potential. |
| Deposit the funds into a bank account | Payout amount will be reduced by 20% for federal income tax and any state tax, if applicable, as well as a 10% penalty if you’re younger than age 59½. Because the payout is made as cash to you, it may impact your current-year tax bracket. | Typically bank accounts are not invested in the market but this could depend on your bank account type. |
Which option works the best for me?
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.
When can I take my pension payout?
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.
Tip: Once you have an idea of when you’d like to take your first payout, contact your plan service provider. It takes time to process your benefit, so plan for at least a month to process the payout. To request a distribution, log in to your Principal account; on your dashboard, click on the defined benefit card on the left side. On the Overview screen on the right side you should see a “Distribution availability” box; click on the arrow to get started.
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.
What’s next?
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 IRA.
