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How to get the most from your pension plan

(MoneyWatch) Welcome back to the last week in my series, 16 Weeks to Plan Your Retirement. This post and my posts last week help you estimate all your sources of retirement income, including Social Security and your retirement savings. These posts build on what we've learned in the previous weeks of this series, showing you how to piece together different sources of retirement income that will last the rest of your life.

This post helps you estimate the amount of retirement income you might receive from your employer's pension plan, if you're lucky enough to participate in such a plan, which is becoming increasingly rare these days. It also gives you some ideas about how to get the most from these valuable plans.

How much pension will you get?

If you've participated in a traditional pension plan, you'll want to get estimates of your monthly income (annuity) at your desired retirement date. You can do this either through an online pension estimator provided by your plan's administrator, or by asking your HR department. Some plans also provide annual statements of your monthly benefit; make sure you understand the assumptions about when the annuity will start, verifying that it's the age you plan to retire. Also check to make sure it's consistent with the form of payment that works best for you, as discussed next.

If you're married or have a life partner, make sure you get estimates for a joint and survivor annuity. I prefer 100 percent, 75 percent or 66-2/3 percent survivor annuities, which continue these percentages of your initial retirement income to your spouse after your death. I typically avoid 50 percent joint and survivor annuities, simply because the living expenses for one person usually amount to much more than half of the living expenses for two people. The exception would be if your surviving spouse would have other sources of retirement income that will sufficiently cover his or her living expenses.

A trap for the unwary

You might be eligible for alump-sum payment instead of a lifetime monthly income, or you may be offered a pension buyout. Normally, I prefer electing the annuity because the monthly income will be paid no matter how long you live or what happens in the economy. It's very user-friendly, which you'll really appreciate as you get older and are less able to manage your money.

But if you take a lump-sum payment rather than the annuity, then you've put yourself in the same boat as millions of boomers who are facing the serious challenge of drawing down their 401(k) accounts so that they don't outlive their money. It's often the case that you'll get a higher retirement income from the annuity form of payment, as I've shown in previous posts.

Another reason to elect the annuity form of payment is to diversify your sources of retirement income. Because it's hard to predict where the economy will go over the course of your retirement, I like having different sources of retirement income that spread your risks, just like diversifying your investments while you're building your nest egg. The best situation is to optimize your income from Social Security, have significant lifetime income from a pension or annuity, and then invest your IRA, 401(k) and other retirement savingsfor supplemental income and a source of ready cash.

If you take the lump sum, then you'll need to add the lump sum to your total retirement savings when determining how to generate retirement income, as discussed in my post last week.

Another trap for the unwary

Some financial planners and insurance agents advise that married couples elect the single life annuity instead of a joint and survivor annuity, and then buy life insurance from them to protect the surviving spouse. This strategy might be called pension optimization or maximization, with the goal of increasing the income over the joint lives of a married couple. In reality, sometimes these schemes work, but often they don't, leaving the surviving spouse with inadequate income.

The only way to see if pension optimization might help you is to do the math to estimate if it has a good chance of increasing your lifetime payout. If you don't feel qualified to prepare this analysis, find a professional who is experienced with these strategies. Make sure they are unbiased in their recommendations, meaning that they won't earn a commission from the insurance that they might sell you. Don't have the insurance agent prepare this analysis for you; work with a professional who isn't selling anything.

If you can't find an unbiased, qualified professional to analyze this strategy for you, simply pass on pension optimization and elect the joint and survivor annuity. Most likely you'll be getting a fair shake from your employer's pension plan, since they are operating that plan simply for your benefit and not as a source of profit.

If you've earned a significant annuity from a traditional pension plan, pat yourself on the back. A guaranteed source of lifetime retirement income can make a big difference in your retirement security. Take the time to analyze how to get the most from these valuable benefits.

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