Expert: Allen - 7/3/2006

Question
Hello Allen,
I left this employer in 1997 buy I'm vested in the pension plan. Going on-line I can check balances and options. At age 61 now I plan to retire probably at age 65. My options at 65 are a one time lump payment of $203,800.00 or a single life annuity amount of $1,374.73. I'm confused regarding the 5, 10, 15 and 20-Year Cerain and Continuous? The 10-year certain and continuous would pay me monthly benefit of $1,251.00 and my spouse (beneficiary) would receive the same amount upon me death. What does the "certain and continuous" mean? Would you take the lump sum? One last questions... I find it odd that the single life annuity is highest at age 64... $1,516.14? Thanks for your help,
Ken

Answer
There are several questions here. I can answer most. But you're the only one who can answer the most important one.

1. A life annuity is paid monthly. Payments stop when you die. A 10 year certain and continuous annuity makes monthly payments as long as you live. If you die before you have received 120 payments, payments are continued to your beneficiary until the plan has made a total of 120 payments. If you die after 8 years, your beneficiary would receive payments for 2 years. If you die after 12 years, no further payments are made. If you're trying to protect someone, you might want to consider a joint and survivor annuity. The amount paid will be smaller but payments will continue as long as either you or your wife are alive.

2. I'm not certain why payments are higher if they start at age 64. Normally they would be about 6-8% lower. My guess is that what they are offering is a Social Security step-up. What this means is that you would receive a larger amount until you are eligible for full Social Security benefits at age 66. Payments would then be reduced to around $1275-$1300 per month as long as you live. The only way to know for sure is to ask the plan administrator.

3. As far as what you should elect. You are the only one who can make this decision. The amount received each year under the life annuity option appears to be about 8% of the lump sum. This is a good return. If you elected a joint and survivor annuity, the annual payment would be around 6.5% of the lump sum. The reason the plan gives these good payments is that there is no residual amount after you die(or you and your wife die with the joint and survivor annuity). If you took the lump sum, you should roll it over to an IRA. You then have to answer some questions. What sort of return do you think you will get on your investments? Is it important that you leave something to your heirs? Do you like the idea of a set monthly payment?

Good luck with whatever you decide.