When you retire, you must choose from among several options of how you would like to receive your distributions. These options determine how long you will receive payments, how long your spouse or beneficiary will receive payments after you die (not all options allow this), and how much you will receive each month or year. Table 29.4 shows several payout options that may be offered by your company. Since different options insure more people and have guaranteed payments, the conversion factor relates the present value of the estimated payments compared to the standard benefit. If you choose the Joint and Survivor 100 percent annuity, you would receive 88 percent of the standard payment, but with the guarantee that both you and your spouse would receive payments for the rest of your lives, with a minimum 10 years guaranteed even if you both died within 10 years.

Table 29.4. Payout Options and Conversion Factors

The standard benefit gives you equal monthly payments for as long as you live. If you die within ten years of the date you retire, payments will continue to your beneficiary until the ten years are up. If you choose the twenty-year certain and life option, payments are guaranteed for twenty years. A life annuity guarantees payments only for as long as you live.

If you are married when you retire, federal law requires that your benefit be paid according to the qualified joint and survivor annuity payment option. This option provides equal payments for as long as you live and 50 percent payments to your spouse for as long as he or she lives. A surviving spouse may also be eligible to receive a ten-year certain or a 75 or 100 percent annuity. If you die before retirement, your spouse will usually be restricted to the qualified joint and survivor annuity option.

Learning about Your Company’s Plan

You should ask a number of questions when investigating your company’s retirement plan or considering new employment. You should also get it in writing, as benefits may change over time.

1. Does the company provide a defined-benefit plan?
2. Is the payout based on your average salary, your final annual salary, or some other amount?
3. How long is the vesting period?
4. What formula does the company use to calculate benefits?
5. What is the normal retirement age?
6. What happens to your payout amount if you retire earlier than the normal retirement age?
7. Is there any advantage to working past age sixty-five?
8. Will the payout include a cost of living adjustment (COLA)?

Defined-benefit plans can be an important part of your retirement plan. However, you must understand the plan—its benefits, drawbacks, and requirements—so that you can receive the maximum amount at retirement.