3 Key Choices Couples Face About Retirement Benefits

35442432 - senior woman kissing on mans cheek

35442432 – senior woman kissing on mans cheek

A few critical decisions about retirement benefits can help couples make their money last — or dramatically increase the chances the survivor will end up old and broke.

Widowed women are twice as likely as their male counterparts to live in poverty during retirement, according to a March study by the National Institute on Retirement Security. But anyone who outlives a mate can be vulnerable to a big drop in income and lifestyle because of shortsighted decisions about claiming benefits.

“Most people don’t quite get the math,” says Delia Fernandez, a certified financial planner in Los Alamitos, California, who primarily advises middle-class clients. “They’re so focused on getting the highest payment now.”

Fernandez remembers one husband who wanted to take early retirement and the maximum possible pension, not realizing that if he died first, his wife’s income would fall by 75 percent.

“It’s all about, ‘I’m getting out of this job and getting the most money because I’ve got things to do,’” Fernandez says. People don’t realize their spouses may have to live for years, or even decades, on truncated incomes.

These are the three decisions that couples need to get right:

How to take retirement benefits

You may be offered a choice between taking a lump-sum distribution from your retirement plan or accepting a series of monthly checks. Theoretically, it’s possible to earn more over time by investing the lump sum, but a bad financial market or a too-rapid withdrawal rate can undermine your returns. By contrast, the monthly checks could be guaranteed income that can last for both your lifetimes.

Couples should try to make sure that at least their basic expenses in retirement are covered by sources of income that are guaranteed, which can include Social Security, pension payouts and annuities, says Gary Koenig, vice president of financial security for AARP’s Public Policy Institute.

All 401(k) plans give savers a lump-sum payout option, and many offer the choice of taking a monthly check, but the amount you get may vary depending on how your investments perform. If you want guaranteed income, you typically would have to roll your money into an IRA, then use some or all of the money to buy an immediate fixed annuity from an insurance company to create a steady income stream.

Those with traditional pensions typically are offered guaranteed monthly checks as the default option, but some pension plans may offer a lump sum. If an adviser suggests you take the lump sum and then buy an annuity, ask how that’s better than just getting the checks from the original retirement plan, says Jim Ludwick, a certified financial planner with MainStreet Financial Planning in Odenton, Maryland.

“In 10 years of analyzing annuities, I’ve never seen one that was better” than what a pension plan offered its participants directly, he says. “The company payout is always more generous because it doesn’t have to make a profit.”

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