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Mastering Your Pension Plan

Pension Plan

What is a pension plan?

A pension plan is an annuity payment that guarantees a lifetime income stream. Now, it depends on your employer, how they work and how they've set things up, whether you can add your spouse or partner to that lifetime income stream. It all depends on who you're working for and who your employer was.

Just as a general definition, pensions are annuities that are contractually guaranteed transfer of risk products that solve for longevity risk. The key with a pension plan is to look at the claims-paying ability. In other words, your employer is going to be on the hook to pay you or you and your spouse/partner for the rest of your life. So you have to make sure that they have enough financial stability to do that. Suppose they do not have enough financial stability to do that. In that case, you might want to look into taking the lump sum if they offer it and then transferring that out to the highest paying single premium immediate annuity. Pension benefits are great, but if you don't work for the government or state government, the federal government, labor union, you probably do not have a pension with your private employer.

How many years do you get a pension plan?

Let's look at it from the payment standpoint. When a company offers a pension plan, typically, that pension payment is for life. So as long as you live, regardless of how long you live, they're on the hook to pay, and if you set it up communal life with your spouse or partner, then it's going to continue uninterrupted and unchanged for that person's life.

But some pensions say, "Hey, we'll pay you for a specific period of timelike only for 20 years or 15 years or for 30 years.” So, the answer to that question from a lifetime income standpoint or a period certain just depends on the plan that you're with and the offerings that they give. So, if you have been given a pension offer from your company, and you want to make sure that you're doing the best thing for your family, make sure you’re making the most informed decision and go with the highest contractual guarantee available.

Think logically; the company that's offering that pension wants to hold onto the money. They don't want to come up with a lump sum to pay you, so they're going to make it attractive for you to stay by offering the highest contractual guarantee possible. So in most cases, pensions run regardless of how long you live.

Is a pension plan the same as a 401K?

A pension plan is an annuity payment that guarantees a lifetime income stream.

The short answer is no. 401Ks are called a defined contribution plan, and a defined contribution plan pretty much took the place of pension plans about 20 years ago. There aren’t many pension plans being offered by companies anymore. 401Ks involve mutual funds and ETFs, and investment choices that hopefully grow your money, but it has nothing to do with pensions. There are some 401Ks that offer some type of income products internally. The Secure Retirement Act allowed 401Ks to offer lifetime income products, so some are, and some aren't.

When you're looking at pension plans versus 401K, 401K plans are for the growth of your money. 401Ks are a tax-deferred growth structure that you can use to increase your money to a certain amount so that when you retire, you can take your 401K asset and convert it into the highest contractually guaranteed annuity for your specific situation. Of course, this means that they have to transfer it to an annuity of some type to create a lifetime income if they need the income. However, a pension plan in its purest form is a lifetime income payment, just like Social Security. Social Security is a pension plan offered by the United States government and is the best inflation annuity on the planet.

We would love to help you convert your 401k to a lifetime income stream by pairing you with the best annuity for your specific situation. Book a call with Stan The Annuity Man today.