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How To Take Advantage Of What the Plan Is Assuming About You!
For most individuals, their pension is a very significant part of the overall assets at time of their retirement along with their home, social security and some personal/retirement account savings.
In deciding how to take your pension among the choices offered under your pension plan, the fundamental decision is whether this pension asset needs to be available not only for yourself but for your spouse and/or other beneficiaries to live on after your death or to provide for some estate/inheritance that you wish to leave behind as well.
For this fundamental purpose, you may very well want to speak with your accountant/financial advisor. There are reasons why it may not be necessary to have your pension provide income to your spouse or beneficiaries. This may include the fact that your spouse has their own pension/retirement assets and doesn't need any portion of your retirement income or your pension is not a significant part of your overall combined assets. But this is not the situation for most individuals. For purposes of this section, it will be assumed that you want to provide continued income to your spouse from your pension or leave an estate and that you are trying to maximize those amounts by selecting your pension option in the most advantageous way. Given this as the goal, and based on the information described in the section What the Plan is assuming about you in charging you for selecting a pension option, you should consider the following factors in determining how to accomplish maximizing the value of your pension asset.
Post retirement cost of living adjustment (COLA) and Retiree medical coverage:
Automatic post retirement cost of living adjustments (COLA) are very rare for private sector pension plan (although some private sector plans give an occasional ad-hoc/discretionary increase). An automatic COLA is however often found in governmental plans (those that do provide one usually have caps on the annual amount of the increase). In determining the amount of the optional form, those plans that do provide a COLA may not reflect that in determining the amount of the optional form of payment and their may be an economic advantage (or disadvantage) in selecting an option as a result. So you need to find out if COLAs are provided and have that considered when reviewing your alternatives.
Some organizations besides sponsoring/providing a pension plan may also provide retiree medical/health benefits. If this is the case, you may want to contact the administrator/human resource department to check to see if they also provide retiree medical benefits to your spouse and what happens upon your death. If retiree medical benefits are only provided if pension benefit are being paid to you or your spouse, that may be an overriding financial factor in your selection of your pension option).
To try and maximize the financial value of your pension income, you need to take advantage of:
What you know specifically about the health of yourself and your spouse as compared to the average health that the pension plan has either decided to assumed or has been required to assume by law.
The current financial environment (e.g., interest rates) versus what the pension plan is assuming.
The flexibility of making changes to your beneficiaries or altering/adjusting the stream of retirement income or amounts while you are alive and after your death based on the available options.
Products and opportunities being offered in the market place which changes faster than the pension plan offerings and can reflect an individual's specific circumstance while a pension plan often cannot.
One of the ways that is the most effective to maximize the financial value and also have the most flexibility is by taking the maximum benefit and using insurance/annuities to provide the continued income and estate/inheritance desired ( See the section: Taking the Maximum Pension and using Insurance/Annuities). The better is your health at the time of your retirement, the more financially effective is this option. This option may not work (may not be the best option) for those who have poor or below average health at the time of retirement. This is because private insurance companies will take your health into account at the time you retire. The better your health, the lower is the cost of insurance or the greater the benefits that can be paid to your spouse or leave as an estate/inheritance. A pension plan cannot use individual health in determining the charge (reduction in benefits) and must charge everyone the same and because of that it sometimes assumes that those selecting the option will have slightly below average health (see the discussion in what the plan is assuming about you in determining what it is charging you for your pension option). But the only way to find out if this is your best option is to see what can be provided to you and then compare it to what will be provided by taking one of the pension plan's optional forms of payment (e.g. joint and survivor).
If taking the maximum pension and using insurance is not a viable alternative to you and/or you prefer to select an option within those available from the pension plan, then consider the following regarding the pension plan options that are/may be available and how knowing about your health, your spouse's health, and the current economic environment can help you try and maximize the value of your pension.
http://www.pensionoptionsadvisor.com
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