older couple looking at devices, drinking coffee

Transitioning to Retirement

Thinking about retirement? Wondering if that's something you can do? You may be mentally or emotionally ready but are you ready financially?

If you have a pension or you’ve participated in a retirement savings plan where you work, and income from that source is a mainstay of your budget, the ideal solution is having your first retirement payment arrive the month after you receive your last paycheck. That requires making arrangements in advance. On the other hand, you may not need the money right away. Then your goal is figuring out the best way to continue to take advantage of the potential for tax-deferred growth. Most plans offer a number of alternatives, and it’s smart to investigate what they are.

The Critical Factors

While you don’t have to decide until you’re actually ready to stop working, making the best choice is critical. The factors you have to consider are your age and health, what you want to provide for your family, and what other sources of income you’ll have.

For example, if you’re in poor health and concerned about providing for a spouse, you might choose a joint and survivor pension annuity that will continue to pay while either of you is alive. On the other hand, if your spouse has a good pension from their employer or is seriously ill, you might choose a single life annuity that will provide a larger amount for you each month than a joint annuity would. In many cases, this option requires a spouse’s written, notarized consent.

The factors you have to consider are your age and health, what you want to provide for your family, and what other sources of income you’ll have.

Or, if it’s your employer’s financial health you’re concerned about, you may decide to take your money out of the plan and invest it elsewhere. 

clipboard task illustration

Pension Plans

When you retire from an organization that provides a traditional pension, you generally have two income choices: a pension annuity or a lump sum distribution.

With an annuity, you receive income each month for the rest of your life or your life and the life of another person, usually but not necessarily a spouse. At the time you retire, your employer calculates the amount you’ll receive based on a number of factors including your age, your final salary, and the number of years you’ve worked for the organization. Income taxes are withheld from each check.

If you choose a lump sum, your employer calculates the amount you’ll receive and transfers the money to an account you designate. If it’s a cash account, income taxes are withheld, whether or not you plan to move the money into an Individual Retirement Account (IRA). If you roll over the amount directly to a tax-deferred IRA, income taxes are not due until you withdraw from that account.

Defined Contribution Plans

If you’re part of a defined contribution plan, such as a 401(k), 403(b), 457, or thrift savings plan (TSP), you have several choices for handling your plan assets. They always include the following:

  1. Leaving your money in the plan, where you may be able to convert it to a pension annuity or take systematic withdrawals.
  2. Rolling over to an IRA.
  3. Taking a lump sum.

Unlike a defined benefit pension, which pays your retirement income out of your employer’s pension fund, retirement income from a defined contribution plan comes from assets held in your name. What you receive depends on how much was invested, how long it was invested, and how the investments performed. Generally the assets that have accumulated are sold at the time you choose an income option and the value becomes the principal that’s used to purchase an annuity contract, transferred to an IRA, or paid out as a lump sum.

A Timing Issue

Before you can begin taking income or roll over your assets, your account has to be valued to determine what it is worth. Every plan values accounts on a regular schedule, but no plan does a separate valuation for account holders who want to move their money or begin distributions. In addition, a 401(k) or similar plan has the right to hold your money for up to 60 days after valuation. Not every plan does, but that could be the case.

Seeking Advice

You’re likely to be more confident about making pension decisions if you work with an experienced professional who can answer your questions and help you analyze different routes to your goals. Your employer may have specialists on staff who know the ins and outs of your plan and how other employees have handled the decisions you’re facing.

Or, you can speak with a Greenpath financial expert to help with your goals. No matter what your finances look like,  they can help improve your money management, aiding in your long-term success. If you're looking at decreasing debt to help get to retirement, Greenpath can assist in developing and executing a strategy tailored to your goals.

Recent Articles

Read more on our blog

While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.

Neither Banzai nor its sponsoring partners make any warranties or representations as to the accuracy, applicability, completeness, or suitability for any particular purpose of the information contained herein. Banzai and its sponsoring partners expressly disclaim any liability arising from the use or misuse of these materials and, by visiting this site, you agree to release Banzai and its sponsoring partners from any such liability. Do not rely upon the information provided in this content when making decisions regarding financial or legal matters without first consulting with a qualified, licensed professional.