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Do I Need a Financial Advisor for My Pension?

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do i need a financial advisor for my pension

If your job comes with a pension, your employer is responsible for funding the pension plan and making sure you will receive the projected income in retirement. However, even people with pensions have retirement-related financial decisions they will have to make and that can benefit from the assistance of a financial advisor. Payment options and tax issues are two of the most significant issues.

A financial advisor can discuss options for funding a secure retirement.

Pension Basics

Pensions are defined benefit retirement plans that guarantee employees a certain financial benefit, such as a monthly check, after they retire. The payment is usually determined by a formula that uses years of service and amount of wages or salary.

Unlike the more common defined contribution plan, responsibility for funding a pension rests on the employer rather than the employee. Someone covered by a pension doesn’t have to decide how much salary to defer or how to invest plan assets. However, there are still some significant choices that could benefit from the assistance of a financial advisor.

How a Financial Advisor Can Help With a Pension

do i need a financial advisor for my pension

Funding retirement with a pension requires fewer decisions by participants, but choosing a payment option is a big exception. Pensions commonly offer different ways retirees can receive benefits. For instance, retirees can choose to receive a stream of monthly payments or in a single lump sum.

A retiree who opts for a stream of payments also has choices. For example, they could choose the single life option that provides for monthly payments for as long as they live. Alternatively, they could choose joint and survivor benefits, which deliver monthly payments until both the retired employee and his or her spouse dies.

Each choice comes with pros and cons that vary in importance depending on the retiree’s individual situation. For instance, single life usually pays a higher monthly benefit than joint and survivor. While that makes single life attractive, if the retiree dies before the spouse, the spouse will receive no further payments if single life was the choice.

As an example of how this might work, if a single-life payment is $2,000 per month, the joint and survivor benefit might be $1,500 monthly. If the retiree dies first, the surviving spouse would continue to get all or part of the $1,500 joint and survivor benefit. With the single life approach, payments stop when the retiree dies.

This choice clearly can make a big difference. A financial advisor can help someone planning for retirement evaluate their life expectancy, lifestyle needs and income sources to make an informed decision between single life or joint and survivor.

Lump Sum vs. Monthly Payment

do i need a financial advisor for my pension

Deciding between lump sum and monthly payout can also benefit from expert advice. Taking a lump sum payout might be preferable to monthly payouts if a retiree experiences unexpected future expenses, wants to guide their own investments or desires to leave a financial legacy to dependents.

However, a lump sum payout will be smaller than the sum of the monthly payments that a retiree can expect. A retiree who opts for a lump sum payout will be responsible for investing the proceeds, which can likely benefit from the guidance of a financial advisor.

Lump sum payments also pose tax issues. Taking a large lump sum can increase tax obligations by putting a retiree into a higher tax bracket for that year and making it difficult or impossible to claim some useful deduction. A financial advisor can direct a retiree toward strategies for reducing this tax hit, such as putting the lump sum distribution into a tax-deferred retirement account such as an IRA.

A financial advisor may come in especially handy when it comes to overall planning for income during retirement. Many retirees have, in addition to pension benefits, income from Social Security, other retirement accounts, annuities and after-tax investment earnings. Some individuals, for instance, may benefit from delaying claiming Social Security so those monthly payment amounts increase while they pay living expenses from other income sources, such as IRA withdrawals.

A financial advisor may also recommend more complex strategies. For instance, a retiree may be better off taking a lump sum distribution, depositing it into an IRA and then converting the IRA to a Roth IRA. This would require paying taxes on the converted funds now, but will allow tax-free growth and withdrawal later on.

Bottom Line

People covered by pensions have fewer decisions than those covered by defined-contributions such as IRAs. However, they do have choices that can significantly affect their comfort and well-being in retirement. Those include deciding whether to monthly or lump-sum payouts and, for monthly payments, whether to take single life or joint and survivor benefits. A financial advisor can help with payout decisions as well as with issues regarding taxes.

Tips on Retirement

  • Consider discussing your retirement plans and options with a financial advisor.  Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Deciding how much to save for retirement involves a lot of considerations, such as how much you have saved now, how much income your retired lifestyle will require and what kind of return on your investments you can expect. SmartAsset’s Retirement Income Calculator can give you the answers.

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