Timur and Marguerite recently met with the benefits administrator at Timurs employer to establish his retirement date
Question:
Timur and Marguerite recently met with the benefits administrator at Timur’s employer to establish his retirement date and to discuss payout options for his pension. Timur just turned 67, while Marguerite, a self-employed artist, will be 62 in 6 months. The benefits administrator was helpful in outlining potential sources of income that they can expect in retirement. Annual estimates are as follows:
Social Security | $9,000 |
Defined-benefit plan | $12,000 (single life annuity) |
Marguerite’s work | $5,000 |
Defined-contribution plan | $10,000 (single life annuity) |
Other | $4,000 |
The defined-contribution payout was calculated based on a 401(k) balance of $250,000 earning approximately 8 percent. The benefits administrator indicated that a 100 percent joint and survivor annuity would decrease yearly benefits by about $2,000 in the defined-benefit plan and $1,500 in the defined-contribution plan.
Would you advise them to take the annuity offered in the defined-contribution plan, which guarantees a 4 percent rate of return, or would you recommend the lump-sum payment? Why? What are the disadvantages associated with your recommendation?