A pension is considered a contract with an insurance company. You purchase a pension by depositing money with the insurance company; in return, a guaranteed income can be paid for a specified period. The pension can be immediate, meaning you receive the income right away, or deferred, meaning you let the money grow and take the guaranteed income in the future.
1. Lifetime Retirement Payments Only
Retirement payments continue for the duration of your life. However, they stop immediately upon your death. Even if you live for 40 or 50 years after you start receiving payments, the guaranteed payments will continue. This is true as long as the insurance company remains in business.
Note: Every state has a system to protect policyholders in case of an insurance company’s bankruptcy. This depends on the laws in your state. There may be a limit to the amount they can pay out, however.
If you choose the lifetime payments only option and start receiving payments, and you die after one year, the insurance does not return the remaining principal to your heirs. You may have the option to purchase a capital recovery option; this will cost you more. Making lifetime payments only a better choice for single individuals without children. But it may not be a great option for married couples.
Choosing the lifetime payments only option will increase the monthly income payment compared to joint retirement options.
2. Joint Retirement Payments
These payments are primarily used by couples. Joint retirement payments are structured similarly to lifetime payments only. The difference is that payments will continue as long as either spouse lives.
While you will receive a lower monthly income compared to the lifetime payments only option, the joint retirement option ensures continued income for the surviving spouse.
Many retirement plans offer a different version of joint retirement payments. This allows the surviving spouse to receive 50% or 75% of the benefit instead of 100%. This option can be used if the spouse needs part of your retirement income after your death, not all of it.
If you choose 100% of the benefit to continue to the surviving spouse, you will receive a slightly lower monthly income compared to choosing 50% to continue to the surviving spouse.
If you are married, you need to decide how your retirement benefits will be paid. Be sure to study all the survivor benefit options your company offers. This study will help you understand the features and drawbacks.
3. Fixed Period Retirement Payments
Also known as fixed period payments, these retirement payments are made for a specified time period. A fixed period payment for 10 years means that the payments are guaranteed for at least 10 years. If you die within the first year, payments will continue to the named beneficiary for up to 10 years after the first payment.
After the initial ten years, the payments stop. Fixed period payments can be a good way to provide income in situations where you have a secondary source of income that will start later.
For example, let’s assume you retire at age 60. But your retirement benefit won’t start until age 65. You might consider purchasing a fixed period pension for five years to provide income for the five years between age 60 and 65.
Fixed period retirement payments can also be a good option for the younger spouse as they are likely to live longer. Fixed period pensions provide some security for the older spouse in case the younger spouse dies first.
4. Lifetime Payments with a Fixed Period
These options pay income for your lifetime or for a fixed period, whichever ends first. For example, you might choose a lifetime with a fixed period of 10 years. If you live for 20 years after starting payments, you will receive income for all that time.
If
She passed away two years after the payments began; the beneficiary will receive payments for eight years to complete the ten-year period.
Summary
Any of these options for retirement payments can work. The best option depends on the presence of dependents, your age and health, and other financial resources you have.
While the option for lifetime retirement payments offers the highest payout, it may be beneficial to have a lower payout with the security of knowing that payments can continue after your death.
Source: https://www.thebalancemoney.com/how-to-understand-annuity-payment-terms-2389018
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