How to Make the Best Plan Distribution Choices at Retirement
- 1). Determine if a defined benefit plan or a defined contribution plan is available. A defined benefit plan is the more traditional retirement vehicle in which benefits are paid based on a formula that uses the number of years worked multiplied by either the average or the final year's salary. The company is solely responsible for the plan's solvency. A defined contribution plan, often known by its IRS code headings, including 401(k), 403(b) and 457, comprises employee and often employer matching contributions. The employee chooses how contributions are invested.
- 2). Use the company's formula if the plan is a defined benefit plan. The company's formula will be used to determine what you receive each month in retirement. As an example, an average salary of $50,000 with 30 years of service multiplied by a factor of 1.5 percent would generate $22,500 in retirement income annually. This figure may be reduced if the retiree opts to provide a portion of these payments to a spouse after death. Some companies provide the option of converting the monthly payment into a lump sum that can be transferred into a rollover Individual Retirement Account. This option should be considered only if the company is financially shaky or if the retiree wants more control over where to invest. In general, taking payments in a monthly annuity from a defined benefit plan is best.
- 3). Money left in a defined plan or in an IRA grows tax deferred until it is withdrawn. Funds from this type of plan can also be transferred to an immediate income annuity, which creates a monthly income flow similar to a defined contribution plan. This also allows for funds to be withdrawn without penalty. People who do not need this money right away should consider "rolling over" defined contribution monies into an IRA and allowing the money to continue to grow tax deferred. If the money is needed right away and the retiree is comfortable managing investments, funds should be put into an investment mix of stocks, bonds and cash. If the retiree is unsure or uncomfortable in managing money and needs the monthly income, an immediate annuity should be considered.