In Your 50s? Find Your Way to Best Benefits

BOSTON (TheStreet) -- For those of us who are directionally challenged, recent technology in the form of mobile apps, GPS devices and Google Maps have made life easier by providing clear directions to where we need to go. They even alert you when there's heavy traffic or changes in street patterns that may affect your route and redirect you accordingly so you can reach your destination.

If only we had a similar device to help us navigate the labyrinth of factors we must consider when deciding how and when to take our pension benefits at retirement. While fewer and fewer companies offer traditional defined-benefit plans, people fortunate enough to have a pension must weigh several factors -- such as life expectancy, income needs and current interest rates -- to determine whether it's more beneficial to choose a one-time lump sum distribution or annuitize the benefits over a lifetime.

Even without a GPS, you can find your way to a good answer to pension benefits.

Complicating matters is the fact legislation is changing constantly and may tip the balance to one option over the other. The climate seems to have changed recently, making monthly income payments more attractive than a lump sum distribution.

Why annuitize?
Passed Aug. 17, 2006, the Pension Protection Act was the most sweeping pension legislation in more than 30 years and included a number of significant reforms affecting pension owners. For example, it changed the benchmark interest rate used to calculate lump sum benefits for all pension plans. Rather than being based on 30-year Treasury yields, the act stipulated that plans use a higher composite corporate bond rate for benefit calculations. This change has been phased in, beginning in 2008, and will be fully implemented in 2012.

Generally speaking, for every 1 percentage point increase in interest rates, there is a 10% drop in the value of the lump sum payment -- and, as noted, the corporate bond rate is much higher than the 30-year Treasury yields. For participants retiring next year and beyond, the result will be a lower lump sum benefit compared with what they would have received without the law (assuming all other factors, such as retirement age remained equal), making annuitizing more attractive.