If you have been informed that your Plan will be terminated or that changes are about to occur, you might want to consider the following steps to ensure that you are on the right path toward retirement.  First, use whatever resources your employer has available to gather the necessary information to determine your projected benefit.  Some resources will be available online while others may only be retrieved through contacting the Human Resources department.

Whichever manner is available to retrieve your benefit options, you should also make sure to generate every payment scenario available from the Plan.  In many plans, the customary options are “Life Only”; 50 / 50; 75 / 75 and 100 / 100.    There are other subtle differences you should be aware of prior to making a lifetime benefit selection as well.

A “Life Only” option usually pays the highest allowable pension payment because it is based on the life of the retiree only.  Once they die, the benefit will cease.    Unfortunately some employees make the mistake of selecting a “Life Only” option without doing their homework.  This may occur because an employee focuses on the fact that it may provide the highest benefit to them during retirement. Unfortunately if the employee would like to leave something to a beneficiary, selecting this option will not allow them to fulfill that goal.

Some advisers suggest selecting a “Life Only” benefit and combine it with the purchase of a life insurance policy to provide benefits / income to their heirs.  This is a strategy that the employee should really become comfortable with before moving forward with it.  In order to do so, they should have all of the benefits and pitfalls provided to them in writing as well as the associated cost and commissions that will be paid.

A 50 / 50 benefit means that a retiree will receive $”X” and when they pass their beneficiary will receive 50% of that amount for the rest of their life.   If they chose a 75 / 75 benefit option, then a retiree will receive $”X” and when they die their beneficiary will receive 75% of that amount for the rest of their life.  If they select a 100 / 100 benefit option, then a retiree will receive $”X” and when they pass away their beneficiary will receive 100% of that amount for the rest of their life.   

Also, some plans may contain additional variations to the benefit opportunities offered to the retiree.  Examples of such are; 5 or 10 year pop-ups or income leveling until the retiree reaches the age of 62.

A 5 or 10 year pop up means that if the beneficiary (not the retiree) passes away first within 5 or 10 years, whichever is selected by the retiree at the outset of the benefit, the retiree can cancel the Joint and Survivor benefit (i.e. 50 / 50, 75 / 75 and 100 / 100) and return to the higher paying Single Life for their life.  Of course by selecting this option, there will be some reduction to their initial benefit to “pay” for that opportunity. This might be worthwhile if the beneficiary is meaningfully older or is in poor health in comparison to the retiree.

An income leveling option (i.e. social security leveling option) is an opportunity offered by some pension plans to “level out” the income for someone that retires early (before age 62).  This gives the retiree a level-income benefit so the amount of retirement income before and after the retiree becomes eligible for social security remains the same.  Should an early retiree chose this option they will receive a larger monthly pension payment until they begin receiving social security.  At that time, the pension check will be reduced by an estimated amount of the monthly social security benefit.  The leveling will only affect the pension amount they will receive not the social security payments. In many instances the retiree should study the effects on their income stream after the age of 62 before selecting this option. 

Now that you are aware of a number of the potential options you will have available to you, the next step is to consider the ages at which you want to retire.  In a number of instances, an employee only selects one date for a desired retirement date when performing a benefit calculation.  That might be the best time for them to retire, yet it might be best to run additional retirement ages to determine if retiring later or earlier is in their best financial interest.

For example, an employee might run multiple scenarios based on a retirement age of 57, 59, 62 and 65.  Each plan has different rules and calculations when determining benefits so it may be advantageous to collect a benefit beginning at 57 for one plan but it may be worth waiting until the age of 62 for another.   That is why the more scenarios you gather; the better understanding you will have when determining your optimal retirement date.

Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.