Do Pensions Really Last for Life? What Happens to Your Income After You Retire
If you worked for decades and earned a traditional pension, one of the biggest retirement decisions you may face is how to take the benefit. Will the pension continue for the rest of your life? Will your spouse continue receiving income after you die? Can the payments run out? And should you take the pension at all if your employer also offers a lump-sum option?
For most traditional defined-benefit pensions, the basic retirement benefit is designed to provide periodic income for life. However, the exact payment structure depends on your pension plan and the option you select when you retire.
That election matters because once pension payments begin, changing your mind may be difficult or impossible.
Before accepting your pension election, compare every available option against what you could potentially accomplish with a lump-sum rollover.
Most Traditional Pensions Can Pay Income for Life
A defined-benefit pension generally promises a predetermined retirement benefit based on the plan’s formula. The traditional way to receive that benefit is as monthly income for life.
The question isn’t usually whether a pension can last for life. The bigger question is whose lifetime it covers and what happens after you die.
Single-Life Pension
A single-life pension generally pays income for your lifetime and stops when you die.
Because the pension is only covering one life, this option frequently produces a higher starting monthly payment than a joint-and-survivor option.
Pros & Cons
Pros: Generally provides a higher initial monthly income, the payment is designed to continue regardless of how long you live, and the structure is relatively simple.
Cons: The income normally ends when you die, if your spouse depends on that pension their retirement income could drop substantially, and depending on the pension election there may be little or nothing left for children or other beneficiaries.
Who Needs It
Who could benefit: A single-life pension may work for someone who is unmarried, whose spouse has sufficient independent retirement income, or who has separately provided for a surviving spouse through investments, savings, or life insurance.
Who might not benefit: Married retirees whose spouses would struggle financially if the pension disappeared may want to consider a survivor option instead.
Joint-And-Survivor Pension
A joint-and-survivor pension provides income during your lifetime and continues some or all of the income to your surviving spouse after your death. Depending on the pension, you may have options such as 50%, 75%, or 100% survivor benefits.
For many qualified pension plans, married participants may automatically have a joint-and-survivor option unless the participant and spouse properly elect another payment structure.
Don’t assume your spouse is or isn’t protected. Review the actual pension election paperwork to determine exactly how much income continues after either spouse dies.
Pros & Cons
Pros: Can provide lifetime income protection for both spouses, reduces the risk of a surviving spouse suddenly losing the household’s pension income, and does not require you to personally manage investments to generate the promised pension payments.
Cons: Your starting payment will generally be lower than a comparable single-life pension, depending on your election the survivor may receive less than 100% of the original benefit, and you may give up access to the pension’s underlying lump-sum value once payments begin.
Who Needs It
Who could benefit: Joint-and-survivor pensions can work well for married couples where the surviving spouse will continue needing pension income to pay housing, healthcare, utilities, food, and other ongoing retirement expenses.
Who might not benefit: A household where the surviving spouse already has sufficient Social Security, pension income, investments, insurance, or other guaranteed income may not need to reduce the pension payment to provide additional survivor income.
Pension With a Period Certain
Some pensions offer a lifetime benefit combined with a guaranteed period.
For example, you might choose a lifetime pension with a 10-year period certain. You receive the pension for life. If you die during the first 10 years, your beneficiary may continue receiving payments for the remainder of that guaranteed period.
This is different from a pure period-certain payout that ends after a specific number of years whether you are alive or not.
Pros & Cons
Pros: Can provide lifetime income while protecting against dying shortly after retirement, and may allow beneficiaries to receive additional payments if you die during the guaranteed period.
Cons: The additional guarantee may reduce your monthly pension payment, beneficiary protection can disappear after the guaranteed period expires, and it may not provide lifetime income to a surviving spouse.
Who Needs It
Who could benefit: This option may appeal to someone who wants lifetime income but is uncomfortable choosing an option that could stop immediately following an early death.
Who might not benefit: Someone whose priority is maximizing personal lifetime income or providing lifetime rather than temporary protection for a spouse may want to compare other options.
Inflation Can Reduce the Value of Your Pension
A pension paying $5,000 per month may sound excellent when you first retire. The problem is that $5,000 twenty years from now may not buy nearly as much as it does today.
Some pensions include cost-of-living adjustments (COLAs), but many do not. Never assume your pension automatically increases with inflation.
If your pension has no cost-of-living adjustment, your paycheck can remain exactly the same while groceries, property taxes, insurance, utilities, and healthcare costs continue increasing.
This can become especially important for someone retiring at 60 or 65 who could potentially spend another 20, 25, or 30 years in retirement.
The Other Choice: Take the Lump Sum and Roll It Into an IRA
Some pensions allow eligible retirees to choose between monthly pension income and a lump-sum distribution. Not every pension offers this option.
If your pension offers an eligible lump-sum distribution, you can generally complete a direct rollover into a traditional IRA without paying current income taxes on the pretax amount. Taxes are generally deferred until money is later withdrawn.
A direct trustee-to-trustee rollover is usually preferable to having the pension check made payable directly to you.
Once the money is in an IRA, you have significantly more control over how the retirement assets are managed and distributed.
Use an IRA Fixed or Fixed Indexed Annuity With a GLWB
One alternative is rolling an eligible pension lump sum into a traditional IRA and purchasing a fixed or fixed indexed annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB).
A GLWB can provide contractually guaranteed lifetime withdrawals without requiring you to permanently annuitize the entire account.
Depending on the contract, lifetime income can continue even if withdrawals eventually reduce the annuity’s account value to zero.
That distinction can be important.
Instead of permanently converting your pension’s lump-sum value into a traditional pension payment, you may be able to create guaranteed lifetime income while continuing to have an account value.
A fixed indexed annuity is also not directly invested in the stock market. Interest may be linked to an index, but stock market losses do not directly reduce your account value because the market falls.
However, withdrawals, surrender charges, rider fees, and other contract provisions can reduce your account value, so the specific annuity needs to be reviewed carefully.
Pros & Cons
Pros: Can provide guaranteed lifetime income, may allow you to maintain an account value instead of permanently giving up control of the entire lump sum, protects your principal from direct stock market losses, single-life and joint-life income options may be available, any remaining account value can generally pass to your beneficiaries, and some contracts offer increasing-income options.
Cons: Annuities may have surrender periods, liquidity can be limited, income riders may have annual fees, indexed interest crediting can include caps, participation rates, or spreads, and guarantees depend on the financial strength and claims-paying ability of the issuing insurance company.
Who Needs It
Who could benefit: This strategy may benefit retirees who want guaranteed lifetime income but also want more control over their retirement assets, protection from market losses, beneficiary protection, or the ability to potentially increase future income.
Who might not benefit: An IRA annuity may not make sense when the employer pension already provides a substantially higher guaranteed payout, attractive inflation protection, strong survivor benefits, or other valuable benefits that cannot easily be replaced.
Do not give up a good pension simply because an annuity provides more flexibility. Compare the actual numbers first.
Could the IRA Annuity Pay More Than the Pension?
Possibly, but it shouldn’t be assumed.
Depending on your age, pension lump-sum value, income start date, interest-rate environment, insurance company, GLWB structure, and whether you want single-life or joint-life income, an annuity could potentially generate similar or higher lifetime income.
It could also generate less.
A better comparison is: Pension Lifetime Income vs. Annuity Lifetime Income + Liquidity + Remaining Account Value + Death Benefit + Inflation Strategy.
Looking only at the first year’s payment can give you the wrong answer.
Increasing-Income GLWB Options Can Help Address Inflation
Some fixed indexed annuities with GLWB riders offer income strategies designed to increase your lifetime withdrawals during retirement.
This can be valuable when you’re comparing the annuity against a pension that provides the same payment every year with no cost-of-living adjustment.
However, an increasing-income annuity does not necessarily mean your payment automatically increases by a guaranteed percentage every year.
The exact formula varies by product. Increases may depend on index performance, interest credits, contract values, or specific rider provisions.
You should compare both the starting income and how future income increases are calculated.
Pros & Cons
Pros: Can help retirement income keep pace with rising expenses, may provide substantially more income later in retirement, and can provide lifetime income rather than requiring withdrawals from a market-based portfolio.
Cons: Starting income may be lower than a level-income option, some increases are not guaranteed every year, and the income-growth formula can vary significantly between annuities.
Who Needs It
Who could benefit: Increasing-income options may work well for younger retirees, people concerned about inflation, and retirees who expect their expenses to increase later because of healthcare or long-term care costs.
Who might not benefit: Someone who needs the highest possible income immediately may be better served by a level-income GLWB or another income strategy.
Pension Maximization With Life Insurance
Another strategy is sometimes called pension maximization.
Instead of taking a reduced joint-and-survivor pension, you may consider taking the higher single-life pension and using part of the additional income to purchase life insurance.
If the pensioner dies first, the pension income stops, but the surviving spouse receives the life insurance death benefit as long as the policy remains in force.
A similar concept can be used with an IRA annuity. You could create higher single-life guaranteed income and separately purchase life insurance to provide a lump-sum legacy for your spouse or other beneficiaries.
Pros & Cons
Pros: May allow you to receive higher lifetime income while alive, can create a separate lump-sum death benefit for your surviving spouse, life insurance death benefits are generally received income-tax-free by beneficiaries, and the surviving spouse may have more flexibility with a lump sum than with a fixed survivor pension payment.
Cons: Life insurance isn’t free, pricing depends on age, health, underwriting, and policy design, you must keep the policy in force for the strategy to work, and if coverage is expensive or unavailable, the joint-and-survivor pension may be the safer option.
Who Needs It
Who could benefit: Healthy retirees who want to compare the economics of higher single-life income plus a death benefit against a reduced joint-and-survivor pension may benefit from running the numbers.
Who might not benefit: This strategy may not work for someone who cannot qualify for affordable life insurance or whose spouse specifically needs guaranteed monthly lifetime income rather than a lump-sum death benefit.
What If You Only Want Income for a Fixed Number of Years?
Lifetime income isn’t necessarily appropriate for every dollar.
If you want income for a defined period, such as 10, 15, or 20 years, you can consider a period-certain pension option if your pension offers one.
If you are eligible for a pension lump-sum rollover, another possibility is rolling the money directly to an IRA and using some or all of it to purchase an IRA-owned period-certain Single Premium Immediate Annuity (SPIA).
A pure period-certain SPIA guarantees payments for the selected term and then stops.
Pros & Cons
Pros: Can provide a predictable payment for a specific number of years, can be useful for bridging the gap between retirement and another income source, and payments may be higher than a comparable lifetime option because the insurer isn’t guaranteeing payments indefinitely.
Cons: The income stops when the guaranteed period ends, you could outlive the income stream, and once annuitized, access to the premium is generally restricted or eliminated.
Who Needs It
Who could benefit: A period-certain strategy can work for retirees who intentionally want to spend down a specific pool of money over a predetermined period or need temporary income before another retirement income source begins.
Who might not benefit: Someone who needs the money to provide income for the rest of their life should generally prioritize lifetime income rather than relying exclusively on a fixed-period payout.
Don’t Forget Long-Term Care Insurance
The pension decision solves an income problem. It doesn’t necessarily solve a healthcare or long-term care problem.
A retiree could have excellent pension income and still face substantial expenses from home healthcare, assisted living, memory care, or nursing-home care.
Depending on your health, age, assets, and objectives, you can also compare traditional long-term care insurance, hybrid life insurance with long-term care benefits, or annuity-based long-term care solutions.
The objective is to avoid having one major care event consume assets that were supposed to support you, your spouse, or your beneficiaries.
Who Should Seriously Compare a Pension With an IRA Annuity?
You should strongly consider running a pension-versus-lump-sum analysis if your pension offers a lump sum and:
- You want more control over your retirement assets.
- You’re concerned about leaving money to beneficiaries.
- You want to explore increasing lifetime income.
- You want protection from direct stock market losses.
- Your pension doesn’t include a cost-of-living adjustment.
- You want to compare single-life and joint-life income.
- You want to determine whether your pension’s payout is competitive.
You may be better off keeping your pension if it already provides an excellent lifetime payout, offers the survivor protection you need, includes attractive inflation adjustments, or you prefer the simplicity of receiving the pension check every month.
There is nothing inherently wrong with keeping a good pension.
The mistake is making an irrevocable pension election without comparing your alternatives first.
When reviewing how lifetime pension payments work, annuities for people nearing retirement can help coordinate retirement income with RMDs, inflation, future care costs, and legacy goals as retirement gets closer.
What We Recommend
Before selecting your pension benefit, request written estimates from your pension administrator for single-life income, every available joint-and-survivor option, period-certain options, cost-of-living or inflation adjustments, and your lump-sum value, if available.
Then compare that lump sum against competitive fixed and fixed indexed annuities with guaranteed lifetime income benefits.
Don’t compare only the first monthly payment. Compare lifetime income, survivor income, liquidity, inflation potential, death benefits, insurance company financial strength, surrender provisions, and what happens to the remaining money after death.
Only then can you determine which choice actually works better for your retirement.
How The Annuity Expert Can Help
At The Annuity Expert, we’re an independent annuity broker and insurance agency. We can compare your pension payout with fixed and fixed indexed annuities from multiple insurance companies to determine how much lifetime income the same lump sum could potentially generate.
We can also compare single-life versus joint-life income, increasing-income options, period-certain annuities, life insurance for pension maximization, and long-term care insurance so you’re looking at your entire retirement income strategy rather than only one monthly pension number.
Contact The Annuity Expert today for free, no-obligation quotes and a custom pension comparison.
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