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How to Harvest the Rewards of Retirement

Second in a four-part series
Introduction• Step One • Step Two • Step Three • Step Four

Step 2
Review Your Financial Resources
If you’re like most people, you’ll have three main sources if income during retirement: your own money, government programs and employer-sponsored retirement plans. The most significant of these three is the last one, and one of the most important decisions you’ll make as you near retirement is the form in which you receive your retirement dollars.

While plans vary, most employer-sponsored plans offer one or more of the following three options.

A. Annuity
B. A lump-sum distribution
C. Minimum distributions

Here’s a description of the three payment options and their variations:

A. Annuity Options
Pro: A guaranteed income that you cannot outlive.
Con: You no longer control the principal and most annuity payments do not adjust with inflation.

An annuity payment plan provides a guaranteed income. The income is usually received monthly and is almost always for your lifetime. Once this choice is made, it cannot be changed. These payments generally do not adjust with inflation.

There are a number of different annuity payout options, some of which may be offered by your plan. Deciding which option is appropriate for you is a highly personal choice and the following definitions of the forms of payouts may be helpful.

Life Annuity: Provides monthly payments during your lifetime with no further benefits after you die. The life annuity generally offers the largest monthly payment compared to other options, but is not suitable if you wish to provide a continuing income to someone after you die.

Life Annuity with Period Certain: Provides a monthly payment during your lifetime, guaranteed for a minimum number of years called the period certain. If you live beyond the period certain, payments continue uninterrupted. If, however, you die before the period certain has elapsed, the payments are made to your beneficiary for the remainder of the period certain. The period certain cannot exceed your life expectancy at the time the annuity is selected.

Joint and Survivor Annuity: Provides a monthly income to you and your spouse while both are alive. When one dies, the income continues for the remainder of the surviving spouse’s life. Payment stops when both of you have died.

Qualified Joint and Survivor Annuity: Provides a monthly income to you (the participant in the retirement plan) during your lifetime. It differs from a joint and survivor option in that payments continue at a specified percentage (e.g. 50 or 100 percent) of your original monthly income for the remaining lifetime of your surviving spouse. If your spouse dies before you, your monthly payment is not reduced,

Period Certain Annuity: Instead of a lifetime payment, this option provides a monthly income for a specific length of time – typically three to 20 years. If you die before receiving all payments, your beneficiary receives payments for the remainder of the selected period. At the end of this time, payments stop, even if you are still living. The length of the period certain must not exceed your life expectancy.

B. Lump-Sum Distribution
Pro: You control all of the assets, and in some situations, taxes can be reduced.
Con: You must invest and manage the money efficiently for the rest of your life in order to meet your income needs – a challenging task, since you now carry the risk of investment decisions, not your employer.

A lump-sum distribution must, among other things, meet all of the following requirements for federal tax purposes:

It must be received within one taxable year (calendar year).
The entire “ balance to the credit of the employee” must be paid.
It must be received on account of death, separation from service or disability.
(Disability applies only to self-employed individuals.)

If you were born before January 1, 1936 or reach the age 59-1/2 by July 1, 1995, and receive your benefits in a lump sum, you may elect to apply special averaging rules to reduce your taxes. In addition, if you were born before January 1, 1936, and received a lump-sum distribution after December 31, 1986, the age 56-1/2 requirements do not apply.

Distribution not qualifying as a lump sum:
Distribution received over more than one taxable year.
Distributions received before age 59-1/2 (unless eligible under the exception explained earlier).

C. Minimum Distribution
Pro: Income in the early years is usually less than an annuity or a lump-sum distribution, allowing the remaining retirement dollars to accumulate tax-deferred.
Con: You (or, if offered, your employer) must be sure to take at least the minimum each year or be subject to a significant excise tax. Administering a minimum distribution program can be cumbersome.

A minimum distribution option allows you a minimize your distribution basing it on your life expectancy and receiving only a minimum amount from your plan. For some individuals, this can be an effective way to continue to accumulate retirement money, while still receiving income from some of the retirement plan proceeds. Even if you are a single individual, you can use a joint expectancy to reduce the required distribution by naming a beneficiary, you can use the date of your birth of your youngest beneficiary on a joint life basis to arrive at the required annual minimum distribution. (If your beneficiary is more than 10 years younger, special considerations apply.)
Taxes and Retirement Benefits:

Generally, qualified retirement distributions are taxable as ordinary income when you receive them.

Lifetime annuity payments allow you to spend payment of taxes throughout your retirement years.

There are set rules regarding the timing and size of retirement distributions. Penalties for “breaking” these rules are IRS excise taxes in addition to ordinary income taxes.

Up to 85 percent of your annual Social Security benefits may be subject to federal income taxes if your total income exceeds a certain amount.

As you can see, it’s important to know the tax implications of receiving your retirement benefits. Consult with a tax advisor to get the most current information, guidelines and advice that fit your situation.

This information has been provided to you courtesy of Ministers' Life, Ascend Financial Services, Inc., Securities Dealer, member NASD/SIPC. 98-0227-85002R