By BRIAN HEPP
After years of accumulating assets to fund your retirement, you eventually reach a point when it’s time to start making use of those funds. When preparing to access your employer-sponsored retirement plan or IRA balances, you’re going to need to make some important decisions. By understanding your alternatives, you can make the appropriate choices for your retirement distributions.
We’ll take a look at some of the key decisions here. Please keep in mind that for tax and legal advice, you’ll want to be sure to consult your attorney or tax advisor for information regarding state and federal tax laws.
For starters, there are two basic types of employer retirement plan distributions — periodic (or partial) payments and lump sum distributions. Pension plans, for example, generally pay distributions exclusively through monthly payments, and the total benefit is usually calculated based on life expectancy. Typically, you have the option of receiving periodic payments over your own single life, the joint life expectancy of you and your spouse, or a specified number of years (sometimes referred to as term certain). The number of options you have is determined by your employer.
Instead of periodic payments, some retirement plans require or allow participants to receive their balances in the form of a lump sum distribution. If you decide to go this route, there are two basic options for handling your lump sum: you can take receipt of your distribution directly, or you can roll your distribution into an IRA.
As you can see already, you may have several options you need to consider. If you have a choice between receiving your retirement distribution through periodic payments or in a lump sum, you may be wondering which to choose. As you would expect, the answer depends heavily on your individual situation. But to help you decide which option is best for you, following are a few important points to consider. ■ Life expectancy. The last thing you want to do is outlive your retirement assets by depleting them too quickly. A monthly pension option — if you have one available to you — would alleviate such concerns by providing you a regular check for the rest of your life. However, you do give up control of your principal in exchange for this dependable income. Receiving your retirement plan balance in a lump sum gives you the opportunity to invest your assets elsewhere to help meet your particular retirement needs. You may wish to generate income or growth from your investments, or a combination of the two. ■ Inflation. You need to remember the impact inflation can have on your investments and the income you expect to generate from them. It’s not safe to assume that today’s income will be enough to cover your expenses a decade or more from now. Choosing to receive a monthly pension benefit locks you into a specific dollar amount paid out over your retirement years. Pension plans generally do not increase these payments to compensate for inflation.
Once you’ve decided on the type of distribution you want, you may still have many investment decisions to make. Your goals and objectives will be different now that you’ve actually reached retirement. To help assess your situation, you should work with your financial consultant to address your new financial needs. Together, you can successfully hatch the nest egg you’ve worked so hard to build.
Originally published in the Santa Monica Daily Press print edition on October 5, 2006. Read the original PDF.