Sep 29, 2022
Understanding severance packages (Part 5 of 5)
Part 5: Pension plans
Whether you’ve been at your place of employment for one year, one decade or your entire career, being dismissed from your job is never easy.
Aside from the emotional aspects of upending your daily routine and leaving colleagues you’ve become close to, your sense of identity may also take a jolt as people are often defined – rightly or otherwise – by what they do for a living.
As you weigh your options for next steps, such as finding another job in your field, trying a new career path, starting your own business, or retirement, there are important financial considerations related to being let go.
In our five-part series on severance-related issues, we explore several key areas pertaining to your finances that you should know about, in case you find yourself in this challenging position.
In this final article, we discuss possible implications for your pension plan when leaving your company.
Your pension benefits
A company-sponsored pension plan is a convenient and effective way to save for your retirement years. This plan is often funded by the employer, but some plans to allow for employee funding. In those cases, if an employee is willing to make additional contributions (typically up to a given percentage of their base salary), the employer will match contributions to an extent, helping the plan’s assets grow faster.
While pension benefits are less common now, some companies continue to offer them. In most cases, you can take your pension benefit with you when you leave the company, or defer receiving pension benefits until a later date. Before you transition out of your company, it’s helpful to calculate an estimate of your benefit amount using different benefit start dates, and keep them for your records.
Options to consider
In addition to choosing when to begin receiving pension benefits, you’ll need to decide on a payment option. Your options often include an annuity payable only for your lifetime – which is typically the highest payment amount – or payments based on both your life and the life of a surviving spouse or beneficiary.
Deciding what percentage of your payment a surviving spouse or beneficiary receives will impact your pension benefit amount. For example, a retiree may have a Single Life Only Annuity option that pays a monthly benefit of $2,000 only for the duration of their life. Alternatively, the Qualified Joint and Survivor Annuity payment option lasts for the retiree’s life and the duration of a spouse’s life. However, the monthly benefit amount may be reduced to $1,850, with a surviving spouse’s benefit of $925 per month. Finally, some pension plans provide the option to take a lump sum. If this is appropriate for you, roll the amount into an IRA to avoid income taxes when the lump sum pension pays out.
Regarding when and how to receive your pension benefits, it’s important to know where your income will come from over the next several years, to understand what your cash flow needs may be. You’ll want to consider income sources like other work earnings, Social Security, investment portfolio withdrawals, etc., to identify potential gaps in your income needs and how your pension benefit may help “fill the gap.”
Your decision should also take other factors into consideration. Age, health, lifestyle, future work income and how soon you’ll need to start living off your investment portfolio are key variables. We build projections to help clients analyze what their income and expenses could be in retirement, where they might generate additional income and how their pension income fits into their bigger retirement picture.
We’re here to help
Over the years, our team has helped many corporate executives and professionals make decisions about their severance and navigate this complicated, often overwhelming process. We’ll develop a personalized strategy, including investment recommendations, to help you make the most of your severance package and position your finances for long-term success.
If you’re leaving your company, you’ll likely benefit from expert support regarding how to integrate your pension plan into your overall retirement strategy. Contact a CI Private Wealth advisor today.
Please note, this concludes our series on severance-related issues. If you missed any of the previous articles, you can click on the links below to read them.
Other topics in this series
- Severance and deferred compensation
- Stock awards and your investment portfolio
ABOUT THE AUTHOR
Lisa is a Partner and Wealth Advisor at CI Brightworth and has served as chairwoman of CIPW’s Business Development Committee. In addition to working with clients, Lisa has published three books, Girl Talk, Money Talk. The Smart Girl’s Guide to Money After College; Girl Talk, Money Talk II. Financially Fit and Fabulous in Your 40s and 50s; and CI Brightworth’s first book, Building Your Wealth Inside Corporate America. Lisa has been featured in The New York Times, The Wall Street Journal, YahooFinance, CNBC.com, and many more, and frequently speaks at seminars across the country.
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