When I Retire, How Can I Tap Into My Retirement Fund?
For many workers, their retirement plans are their most important investments. According to the United States Labor Department’s Employee Benefits Security Administration (EBSA), the average American can expect to rely on their savings for 18 years after retirement, which means deciding when, and how, to tap into retirement funds is one of the most important decisions most workers will ever make.
Defined Benefit Pension
Defined Benefit Plans vary by employer, but typical options include the following:
- Under a Straight Life Annuity option, the individual will get a fixed monthly benefit from the day he/she retires until the day he/she dies. No beneficiary payments are made. This is generally the default option for an unmarried retiree.
- Under a Joint and Survivor Annuity option (J&S), the individual can choose to have his or her beginning benefit lowered by some set percentage so benefits will continue to go to the spouse after the individual dies. This is generally the default option for a married retiree.
- Note: A J&S restore option is sometimes offered to retirees. This option restores the individual’s benefit to the full amount if his or her spouse dies first.
- Under a Contingent Annuity option, the individual can choose to have his or her beginning benefit lowered so that a set percentage of his or her benefit will continue to go to a non-spouse beneficiary after the individual dies. If the retiree is married, the retiree’s spouse would have to waive his/her qualified survivor benefits by providing written and notarized spousal consent so that the retiree could name a different beneficiary.
- Under a Ten-Year Certain and Continuous option, the retiree receives monthly pension payments for the duration of the retiree’s lifetime. If the retiree dies before receiving benefits for 10 years, the beneficiary will receive the reduced benefit for the balance of the 10 years. If the retiree dies after receiving benefits for 10 years, no survivor benefits are payable. If both the retiree and the beneficiary die within the 10-year period, remaining payments will be paid to any remaining beneficiaries, then to the retiree’s estate.
- A Level Income option allows an individual’s combined retirement income from a pension plan and from Social Security to remain fairly consistent starting from the retirement date, where an individual retires before the age for which he/she becomes eligible for Social Security benefits. Initial payments are higher under this option and then reduce once the retiree becomes eligible for Social Security benefits.
- A Lump Sum Distribution allows an individual to receive the entire value of the benefit as a single lump sum payment instead of lifetime monthly payments. This option often is available up to a certain dollar amount.
- A spouse can decline the right to continue receiving payments after the individual dies.
Note: Pension payments begin once the individual has retired and picked the manner in which he or he wants to have funds withdrawn.
An individual can take money from his or her 401(k) account at age 59½ without being subject to a 10 percent early distribution penalty. Any money withdrawn from a 401(k) account will be subject to tax. Many people roll money from a 401(k) account into an IRA or purchase an annuity to provide them with an income stream during retirement. To decide what to do with your money, consult a financial planner or investment advisor.
After reaching age 59 1/2, an individual can withdraw freely from an IRA account. Note that there is a 10% penalty for withdrawals before age 59 1/2, but there are several ways to avoid this penalty, such as by receiving a series of substantially equal payments (in the form of an annuity) over the individual’s (or the individual and his/her beneficiary’s) life. Funds coming out of a traditional IRA are taxable in the individual’s top tax bracket, except to the extent that they represent a return of nondeductible contributions. With traditional IRAs, the law requires that you begin taking a set minimum amount out of the fund when you reach 70 1/2. A Roth IRA is not subject to this withdrawal requirement.
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