Ask the Hammer: Tips on Selecting the Best Retirement Plan Payout Option

Robert Powell, CFP®

What's the best retirement plan payout option?

That, in essence, is a question a Retirement Daily recently posed to Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners.

Specifically, the reader asked the following: I'm about to retire from a county job where I have a pension and the option to take my pension in one of the following ways: 

Option one will provide me with my full retirement allowance in monthly payments as long as I live. However, all allowance payments stop when I die and no benefits are provided to survivors.

Option two provides a lifetime allowance to me which is about 1% to 5% less per month than the first option. The annuity portion of my allowance is reduced to allow a benefit for my beneficiary. Upon my death, my surviving beneficiary of record will be paid the remaining balance of my accumulated total deductions from my annuity reserve account.

And option three is a joint and last survivor allowance, which provides me with a lifetime allowance about 7-15% less than that which I would receive under the first option. Upon my death, my designated beneficiary will be paid a monthly allowance for the remainder of his or her life. The survivor benefit will be equal to two-thirds of the allowance that was being paid to me at the time of my death.

How do I evaluate these options and pick the one that's right for me?

According to Levine, this a classic pension dilemma, especially for government workers who are more likely to have a pension than private-sector workers today. 

So, what's the best option? According to Levine, the answer depends on goals and risk aversion. "Ask, for instance, how important is it to you to provide income for another individual presumably your spouse in this case," he says. "And how important is it to them?"

Ask too what other assets or income sources do you and that person have together such that if the pensioner should pass away early what would happen to the surviving spouse. What's the worst-case scenario how would that impact the people you care about most? Would they be able to survive? Would they have enough? And if not, what would they do? 

Could they go back to work? Are they young enough to do that? Would they have to dramatically decrease their standard of living? 

These are all critical questions, said Levine in a video interview. 

It's also important to consider some tactics if you choose option one.

If you choose option one, for instance, could you save a portion of that check for the surviving spouse should the pensioner die early? Or would it make sense to use something Levine called pension maximization or pension max? That's a tactic where the pensioner chooses option one and buys a life insurance policy with a portion of the check for the benefit of the surviving spouse should the pensioner die early.

In essence, Levine said you're trying to make the best decision with the information you have available at the time. "Consider the things that are most important to them first and worry about making sure that those things have the highest probability of happening," he said. 

Two other factors to consider: Think about your household's income and expenses, and assets and liabilities when making your decision. Don't base it just on the pensioner. And two, don't overestimate the reduction in expenses when one spouse dies.


Ask The Hammer