When you retire, your paychecks will stop.
But you want to have fun. You have been putting off so many things, thinking “When I retire, I am going to {fill in the blank with that thing you really want to do, but have to put off until you have more time }”. How will you pay for retirement if you are not getting a paycheck?
That is where retirement planning comes in.
The idea is to make sure that the nest egg you have accumulated, plus income from sources like Social Security and pensions will be able to pay for your expenses in retirement.
I have written about expenses to consider in retirement. If you are fortunate enough to have a pension, let’s look at a few tips to help you when gathering information about your pension to prepare for retirement planning.
Where to find information about your pension
Information can be found in the Summary Plan Description for your pension. It can usually be found on the website for your pension or from your human resources department. Or if you are in a union, talk with your union representative.
What kind of plan is it?
Is this a pension or a cash-balance plan? A pension is not portable, if you leave your employer then the pension will stay with the employer until you are of retirement age. If it is a cash-balance plan and you leave, it is portable; you may keep it with the employer, or roll it into an IRA. There are other differences as well. Consult your Summary Plan Description for the details of your plan.
Important ages or milestones for your pension
Knowing what ages or milestones are significant for your plan may impact your decision about when to retire. Keep in mind this could also be a combination of your age and years of service.
- Find out the age at which you become fully vested in your pension. Vesting means that you keep contributions made on your behalf by your employer.
- Find out the earliest age at which you could retire with a pension.
- Find out the age at which you get your full benefit, any benefit taken before that age will be a reduced benefit.
How can you get your money?
Each plan has different options. Find out what your plan offers. Can you get a lump sum? Can you take a partial lump sum and the rest in monthly payments for the rest of your life? Does your plan offer a survivor option so that if you pass away, your spouse will still receive an income?
Is there a Cost of Living Adjustment?
A Cost of Living Adjustment, or COLA, would mean that the monthly payment would go up each year to adjust for inflation. This is an unusual benefit, most employers do not offer this on their pension plans. Many union plans do. The Missouri Teacher’s pension is an example of a pension that has a COLA. If your pension has a COLA, find out how yours works.
How much money can you expect?
This is the fun part of the information gathering exercise; finding out the estimate of how much money you would get at retirement. There is usually a website where you can run pension benefit estimates, if not then talk with your human resources department or union representative. Find out pension benefit estimates for the age at which you would like to retire and the age at which you get the full benefit. Also look at other ages so that you can compare the amounts based on different retirement ages.
Does your pension plan set a maximum benefit?
What does it take to max out the pension? Can you buy credits to increase your pension payment?
Investing time now in understanding your pension will reap rewards in retirement, allowing you to make the most of your benefit.