A traditional pension, also called a defined benefit plan, promises a set monthly payment for life based on your salary and years of service. Fewer private employers offer them today, but they remain common for government, education, union and long-tenured corporate employees. Because most pension elections cannot be changed once payments begin, it pays to understand the options before you sign.
How the benefit is calculated
Most plans use a formula such as a percentage of your final average salary multiplied by your years of service. Your plan's summary plan description explains the exact formula, the normal retirement age, and whether early retirement reduces the payment. Ask the plan administrator for a benefit estimate a year or two before you plan to retire.
Single-life versus joint-and-survivor payments
The single-life option pays the highest monthly amount but stops when you die. A joint-and-survivor option pays less each month but continues paying a percentage, often 50%, 75% or 100%, to your spouse for the rest of their life. Federal law requires that married participants in most private plans take a joint-and-survivor form unless the spouse signs a written waiver. Compare the reduction against the security it buys; for many couples the survivor benefit is worth far more than the difference.
Lump sum or monthly income?
Some plans offer a one-time lump sum instead of monthly payments. A lump sum gives you control and can be rolled into an IRA, but it also transfers all investment and longevity risk to you. Monthly payments are simpler and protect against outliving your money. Consider your health, other guaranteed income such as Social Security, and whether you want to leave an inheritance.
Cost-of-living adjustments
Many public pensions include annual cost-of-living adjustments; most private pensions do not. Without an adjustment, a fixed monthly payment loses purchasing power over a long retirement, so plan for the gap with other savings.
Protection if the plan runs into trouble
Most private defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC), which pays benefits up to legal limits if a plan fails. Public plans are not covered by PBGC but are backed by the sponsoring government. Keep your plan's contact details and your election paperwork with your important documents.
