If retirement is only a year or two away, your pension may soon become one of the most important decisions in your financial life.
At first, the choice may seem simple. You may receive a packet from your employer or pension plan with several payout options. One may offer the highest monthly payment. Another may provide income for a spouse. Another may guarantee payments for a certain number of years. Some plans may even offer a lump sum.
But this decision deserves careful attention.
In many cases, once pension payments begin, your election cannot be changed. The Pension Benefit Guaranty Corporation notes that after the date of your first payment, you generally cannot change your selection. That means the option you choose can affect your income, your spouse’s income, your tax picture, and your financial flexibility for the rest of retirement. [pbgc.gov]
If you are retiring in the next two years, now is the time to review your pension options carefully. Waiting until the paperwork arrives, or until your retirement date is just weeks away, can make the decision feel rushed.
What pension decisions should you review before retirement?
Before you retire, review:
- Your pension payout options
- Whether to choose a single-life or joint-and-survivor annuity
- Whether a lump sum is available and appropriate
- How your choice affects your spouse or beneficiary
- How taxes may apply to pension income
- How your pension coordinates with Social Security
- How your pension fits with savings, investments, and retirement expenses
- Whether your decision becomes permanent once payments begin
A pension election should not be made by looking at the monthly payment alone. It should fit into your full retirement income plan.
Why the two years before retirement matter
The final two years before retirement can move quickly.
You may be thinking about your retirement date, healthcare, Medicare, Social Security, taxes, investment accounts, debt, and whether you are emotionally ready to stop working. In the middle of all that, pension paperwork can feel like one more task to complete.
But your pension decision deserves more time than that.
A pension can provide steady income for life. Some options may also provide income for a spouse or beneficiary after your death. PBGC describes several common pension benefit options, including straight-life annuities, certain-and-continuous annuities, joint-and-survivor annuities, and certain pop-up survivor options when available. [pbgc.gov]
Each option serves a different purpose.
The real question is not just, “Which option pays the most today?”
A better question is, “Which option best supports the retirement we are trying to build?”
The highest monthly payment may not be the best choice
One of the biggest mistakes people make with pensions is focusing only on the option with the highest monthly income.
That can be risky.
The highest monthly option is often a single-life annuity. PBGC explains that a straight-life annuity provides fixed monthly payments for the participant’s lifetime, but no survivor benefit is paid after the participant’s death. [pbgc.gov]
That may work for some retirees. For example, it may make sense for someone who is single, has no dependents, or has other assets that can support loved ones.
But for married couples, or for households where one person depends heavily on pension income, this choice can create a serious survivor-income gap.
A lower monthly payment may provide more long-term protection if income continues to a spouse or beneficiary.
The best pension option is not always the one with the largest number on the page. It is the one that best protects the life you are planning for.
Common pension options to understand
Every pension plan is different, but many offer some version of these choices.
- Single-life annuity
A single-life annuity generally pays income for your lifetime only.
The benefit is that it often provides a higher monthly payment than options with survivor protection. The tradeoff is that payments usually stop when you die. PBGC describes this as a straight-life annuity that pays fixed monthly benefits for life with no survivor benefit after death. [pbgc.gov]
This option may fit some situations, but it should be reviewed carefully if a spouse or family member depends on your retirement income.
- Joint-and-survivor annuity
A joint-and-survivor annuity provides monthly income for your lifetime and then continues a portion of that income to a spouse or other beneficiary after your death.
PBGC identifies common survivor percentages such as 50%, 75%, or 100%, depending on the option selected. [pbgc.gov]
The higher the survivor benefit, the lower the monthly payment may be during your lifetime. That reduction exists because the pension may pay income over two lifetimes instead of one.
This is often one of the most important decisions for married retirees.
Ask:
- Would my spouse have enough income if I died first?
- How much income would continue?
- Would Social Security, savings, and investments help fill the gap?
- Is the lower monthly payment worth the survivor protection?
If pension income is a major part of your household income, the survivor option deserves a close look.
- Certain-and-continuous annuity
A certain-and-continuous annuity generally pays monthly income for your life, with a guaranteed payment period such as 5, 10, or 15 years.
PBGC explains that if you die before the end of the selected certain period, your beneficiary receives the same monthly benefit for the remainder of that period. If you die after that period ends, payments stop when you die. [pbgc.gov]
This can provide some beneficiary protection, but it is not the same as lifetime survivor income.
That distinction matters.
- Pop-up survivor option
Some plans may offer a pop-up option.
PBGC describes a joint-and-50% survivor pop-up annuity as an option where, if the beneficiary dies before the participant, the participant’s monthly benefit increases to the straight-life annuity amount for the rest of the participant’s life. [pbgc.gov]
Not every plan offers this feature.
If yours does, it may be worth reviewing because it can affect both survivor planning and monthly income flexibility.
- Lump sum option
Some pension plans may offer a lump sum instead of monthly lifetime payments.
A lump sum can provide flexibility, investment control, and potential legacy planning opportunities. But it also shifts responsibility to you.
PBGC explains that an annuity provides lifetime monthly income, while a lump sum is a one-time payment that must be managed to provide future income. PBGC also notes that a lump sum carries the risk of outliving the money if it is not managed carefully. [pbgc.gov]
A lump sum may make sense in some cases. It may be worth considering if you have strong savings, a clear withdrawal strategy, other income sources, health considerations, or legacy goals.
But lifetime pension income can also be valuable, especially if you want predictable monthly cash flow.
This is not a decision to make in isolation.
Review the decision with your spouse or family
If you are married, your pension decision may affect more than just you.
PBGC notes that if a participant is married when benefit payments begin, the spouse must provide written consent for the participant to elect a benefit form other than the automatic form the plan would pay to a married participant. [pbgc.gov]
That is important because survivor income can shape a household’s financial security for decades.
Before choosing a pension option, couples should talk through:
- How much income each person would need if one spouse died first
- Whether Social Security survivor benefits would help
- Whether savings and investments could replace lost pension income
- Whether life insurance plays a role
- How health and family longevity may affect the decision
- Whether one spouse is more comfortable managing investments than the other
This is not just a form to complete.
It is a household income decision.
Social Security timing should be part of the conversation
Your pension decision should also be reviewed alongside Social Security.
Social Security benefits can begin as early as age 62, but benefits are reduced if claimed before full retirement age. The Social Security Administration states that people can start retirement benefits as early as age 62, but benefits are reduced for each month they are claimed before full retirement age. For those born in 1960 or later, claiming at age 62 results in about a 30% reduction compared with full retirement age. [ssa.gov]
If you delay Social Security past full retirement age, your benefit can increase until age 70. The Social Security Administration notes that delayed retirement credits can increase your monthly benefit. [ssa.gov]
That means your pension may play a different role depending on when you claim Social Security.
Ask:
- Could pension income help bridge the gap if I delay Social Security?
- Would a higher Social Security benefit reduce pressure on my portfolio?
- If one spouse has a smaller Social Security benefit, does survivor pension income become more important?
- Would claiming Social Security early create a permanent reduction that affects long-term income?
These decisions are connected. They should be reviewed together.
Taxes can change the real value of your pension income
Pension income is not just about the gross monthly amount.
Taxes matter.
The IRS states that retirement plan withdrawals are generally included in taxable income, except for amounts that were previously taxed or that qualify as tax-free distributions. [irs.gov]
Depending on your situation, pension income may affect:
- federal taxable income
- state income taxes
- Social Security taxation
- Medicare premium brackets
- Roth conversion planning
- charitable giving strategies
- required minimum distribution timing
If you also have an IRA, 401(k), brokerage account, rental income, or business income, your pension is only one piece of the tax picture.
That is why it helps to review your expected retirement income before making a pension election.
Required minimum distributions still matter
Even if your pension provides monthly income, you may also have IRAs, 401(k)s, or other retirement accounts.
The IRS states that required minimum distributions generally begin when you reach age 73 for traditional IRAs, SEP IRAs, SIMPLE IRAs, and most retirement plan accounts. Roth IRAs and designated Roth accounts generally do not require withdrawals during the original owner’s lifetime. [irs.gov], [irs.gov]
This matters because pension income plus required minimum distributions can increase taxable income later in retirement.
If you retire before RMD age, the years between retirement and required withdrawals may create planning opportunities. Depending on your situation, that may include Roth conversions, strategic withdrawals, or tax-bracket planning.
Your pension election can affect how much flexibility you have in those years.
Questions to ask before choosing a pension option
If retirement is within the next two years, these questions can help guide the conversation.
Income and lifestyle
- How much monthly income will I need in retirement?
- Which expenses are fixed?
- Which expenses may change?
- Will my pension cover basic needs or supplement other income?
Survivor protection
- If I die first, how much income would my spouse need?
- Would Social Security and savings be enough?
- Does the pension option provide lifetime survivor income?
- Would life insurance play a role?
Health and longevity
- How is my health?
- How is my spouse’s health?
- Is there a meaningful age difference?
- Is longevity risk a major concern?
Investment and tax planning
- Would a lump sum give flexibility or create too much risk?
- Am I comfortable managing a large retirement asset?
- How would the pension affect taxes?
- How does the pension coordinate with IRA, 401(k), and brokerage withdrawals?
Timing
- When do I want payments to begin?
- What happens if I retire earlier or later?
- Are there deadlines for submitting paperwork?
- Can I change my selection after payments begin?
The answer to one question may change the answer to another.
That is why a pension decision should be part of a full retirement income plan.
A two-year pension review checklist
If retirement is approaching, use the next two years wisely.
24 to 18 months before retirement
- Request updated pension estimates
- Review all available payout options
- Estimate retirement expenses
- Build a retirement income timeline
- Review Social Security claiming options
- Identify healthcare and Medicare timing needs
18 to 12 months before retirement
- Compare single-life, survivor, period-certain, and lump sum options
- Review tax projections
- Review spouse or beneficiary income needs
- Evaluate whether your investment portfolio supports your pension choice
- Review estate planning and beneficiary designations
12 to 6 months before retirement
- Confirm deadlines with your pension plan
- Recheck your retirement date and income needs
- Coordinate with your financial advisor and tax professional
- Decide how pension income fits with Social Security and portfolio withdrawals
- Review whether your election requires spousal consent
Final 6 months before retirement
- Finalize your preferred pension option
- Confirm paperwork requirements
- Keep copies of all election documents
- Review first-year retirement cash flow
- Confirm tax withholding choices
The goal is simple: avoid making a permanent decision under pressure.
A local planning note for Arkansas and Arizona retirees
Retirement planning is personal, but local realities matter.
A retiree in Fort Smith, Rogers, Jonesboro, Little Rock, Conway, or Russellville may be coordinating pension income with IRA withdrawals, Social Security, a business transition, or family planning goals.
A retiree in Scottsdale or Surprise may be thinking about taxes, healthcare expenses, housing costs, portfolio income, or relocation decisions.
Landmark Financial serves clients across Arkansas, Arizona, and nationwide, helping individuals and families review retirement income, investment strategy, pension decisions, and long-term planning needs.
A Thought to Leave You With
If you are retiring in the next two years, your pension decision deserves time and attention.
The option you choose may shape your income for the rest of your life. It may affect your spouse’s future income. It may change your tax picture. It may influence how you use savings, investments, and Social Security.
And in many cases, once payments begin, the decision cannot be changed.
That is why now is the time to review your pension options.
A thoughtful pension review can help you make a decision that supports not only your retirement date, but the years that follow.
Before you make a pension election that could shape the rest of your retirement, take the time to review your options with a team that understands how each decision fits into the bigger picture. Work with Landmark Financial to start the conversation.
The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company. For educational purposes only. This material should not be construed as investment advice. Please consult your financial professional before making any investment or financial decisions.