Most long-term 3M employees are fortunate enough to have a pension – in some cases, a great pension! Those that started before 1999 – Portfolio A – have the best available pension options within 3M.
Before for we go in to detail about evaluating which option is best for you, I would like to mention that you should feel fortunate that you are in a position to receive a pension. Many people planning for retirement do not have that sort of luxury that you do.
There are a few core pension options that are available and I will talk about: Single Life, 100% Joint and Survivor and 50% Survivor.
Single Life – This option will assure the highest payout, but the most risk. If the beneficiary passes away then there is no benefit left to anyone else. This option is best suited for those that are not married, think they will have a long life expectancy or have a spouse that will not depend on their pension benefit if they were to pass.
100% Joint and Survivor – This would be considered the most conservative option available because as long as either the beneficiary or their spouse is alive the benefit will continue. My experience has shown that this is the most-often selected option due to the low-risk nature.
50% Joint and Survivor – This option would fall in between the previous two options because the surviving spouse only gets 50% the primary beneficiary’s amount. The ideal candidate for this would assume that if the primary beneficiary passes before the surviving spouse, they would not need to full amount, therefore, 50% would be a sufficient benefit amount. By selecting this option, you initial amount would be a bit less than Single Life, but a bit more than 100% JT.
There are a variety of considerations that you should think about before you make the big decision:
1. When you retire – This is important because if you plan to retire young, you will get a reduce amount than if you waited until age 65. Although it may be enough to cover your expenses today, will it be enough to help support your lifestyle down the road – probably NOT!
How you supplement your income in retirement is probably the most important consideration. Will your investments, Social Security or other sources provide adequate income for your family? Proper planning will be required to figure this out.
So if you plan to retire “young” make sure you project out where your income will come from and what you anticipate your expenses will come from in 5-10 years.
Figure out your future income gap and the best way to solve for it.
2. Spousal needs – There have been a time or two when I have been having a conversation with a family and the awkward situation arises where the spouse with the pension says they will take single life. The other spouse then turns and looks at them giving the, “Are you forgetting about me look?” These are never fun meetings to be associated with.
Very simply, you and your spouse need to consider each other’s needs and resources if one of you were not around. I think that the last thing any of us would want would be to put our loved one in a hardship situation due to poor planning regarding pension selection.
3. Social Security – When you plan to take Social Security has a huge impact on when it is best to take your pension and vice versa. These are guaranteed incomes to you. By taking one or the other earlier, it may allow you to delay collecting the other.
I would advise running some scenarios to see where break-even points are and what potential advantages and disadvantages are presented by each. Along these same lines, you would be running scenarios to determine how you maximize Social Security. There are over 81 ways to claim Social Security. Have you done your research?
Think of this as your retirement income puzzle.
4. A financial plan – If you have heard me speak before or have been reading the blog, there is no secret that I am a huge advocate for doing a FINANCIAL PLAN. Why? Very simply, prescription without diagnosis is malpractice.
A good doctor does not just write you a prescription. They run tests, ask questions and other activities to make sure they know all the details. The same is true with your finances. If you just make decisions without weighing all available factors against each other you are probably not knowing all of your risks and potential outcomes.
Envision a scenario where you know how your pension, investments, Social Security, taxes and income needs all affect each other. Wouldn’t you like to know how to maximize all of these and create a cohesive plan that allows of your resources to work together to minimize your risks?
That is what is financial plan will do for you.
In conclusion, know your options and how they affect each other. Remember you only get to select your pension option once. Educate yourself so you make the best choice for your family.
Make it a great week.
If you’d like a complimentary copy of our “5 Critical Mistakes 3m Retirees Make” Report, simply click here to download it.