Choosing the Right Pension Option

In Articles, Articles: Kansas City Office, Articles: Salt Lake City Office by Scott Dougan

Choosing the Right Pension Option: A Lifelong Decision in Disguise

One of the most common and consequential decisions facing new retirees is choosing the right pension payout option. If you’re retiring from a company, school district, or municipality, chances are you’ve been handed a list of confusing choices with names like Single Life Annuity, 50% Joint & Survivor Annuity, or PLOP (Partial Lump Sum Option). These decisions aren’t just paperwork, they can dramatically shape your financial future. So, let’s unpack them.

A Morbid But Important Question

I often joke (half seriously) that this decision would be a breeze if you could just tell me how long you plan to live. Every pension option is tied to your life expectancy, and often, your spouse’s as well. And that’s the real crux of it: how do we make confident financial decisions today when we don’t know how many tomorrows we’ll get?

In truth, this question lies at the very heart of retirement planning. Planning for retirement is, at its core, preparing to financially survive a long life. It’s about ensuring that if you live a long time, you don’t outlive your resources. Choosing how much you can safely spend in retirement – and how to structure guaranteed income like pensions – is simply one side of the life expectancy coin.

Understanding the Options

When a client brings us their pension paperwork, we build a series of scenarios to help them visualize the long-term consequences of each option. Here’s a typical breakdown:

  • Single Life Annuity: $2,000 per month for your lifetime. Payments stop when you pass away. If your spouse survives you, they receive nothing from the pension.
  • 50% Joint & Survivor Annuity: $1,700 per month while you’re alive, and $850 per month to your surviving spouse for the rest of their life.
  • Partial Lump Sum Option (PLOP): $1,400 per month for life, no survivor benefit, plus a $70,000 lump sum. That lump sum is usually rolled over into an IRA, tax-free.

Each option comes with trade-offs. The Single Life option provides the most monthly income but offers no safety net for your spouse. The Joint & Survivor option provides peace of mind and security for both spouses, but less income while both are living. The PLOP gives you a smaller monthly income, but you walk away with a sizable chunk of money you can invest, preserve, or earmark for future needs.

So, What’s the Right Answer?

As with most things in financial planning, it depends.

If you’re married, your spouse’s health, income needs, and longevity outlook are major factors. If one of you has a strong family history of long life and good health, it may make sense to favor lifetime income with a survivor benefit.

On the other hand, if you value flexibility and legacy planning, or want more control over your money, the PLOP might be appealing. That lump sum could be used to help pay for long-term care, fund a trust, support grandkids, or provide extra cushion in case markets or health costs surprise you later on.

Every situation is different, but the central question remains the same: How long do we expect to live, and how do we want to structure our finances in light of that uncertainty?

Why This Choice Matters So Much

Whether you’re choosing a pension option or simply deciding how to draw income in retirement, you’re always working within the framework of uncertainty. That’s why modeling out different life expectancy scenarios is so important – it helps make this abstract concept more concrete. You get to see, on paper, how your choices ripple across decades.

And remember, pension decisions are often irrevocable. That makes it even more critical to think through the implications clearly and carefully.

In the End

If you’re faced with a pension decision, don’t go it alone. There’s no one-size-fits-all answer here, and the stakes are high. We’re here to help you run the numbers, ask the right questions, and make a choice that aligns with your values, goals, and financial reality.

Having choices in retirement is a gift. But having confidence in the choices you make? That’s peace of mind you can bank on.