Understanding Severance Packages, PART 5: Pension plans

Whether it comes after a year, a decade or a whole career, being dismissed from your job is never easy. Routines are upended, relationships are disrupted, and your sense of identity may take a hit. Your next step could be a job in the same field, a new career path, an entrepreneurial project or perhaps even retirement. But while you think it over, you’ll also have some important financial issues to consider.

Welcome to the fifth article in a five-part series about severance-related issues that you should know about if you ever find yourself in this challenging position. Today, we look at 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. Such plans are often funded by the employer but sometimes also 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 some or all of the contributions to help the plan’s assets grow faster.

While pension benefits are becoming less common, 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 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 receiving $925 per month.

Finally, some pension plans provide the option to take a lump sum. If this is appropriate for you, you can generally 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 and to understand what your cash flow needs may be. You’ll want to consider income sources like other work earnings, Social Security and investment portfolio withdrawals in order to identify potential gaps in your income needs and how your pension benefit may help fill them.

Your decision should also take other factors into consideration, such as your age, health, lifestyle, future work income and how soon you’ll need to start living off your investment portfolio. 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 executives and professionals navigate the complicated and often overwhelming severance 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 Corient Wealth Advisor today.

Other topics in this series

• Part 1: Severance and deferred compensation
• Part 2: 401(k)
• Part 3: Stock awards and your investment portfolio
• Part 4: Insurance

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