You're excited today is the day you've been waiting for. You have an appointment with your human resource department to go over your retirement packet containing all of your financial information. You'll see exactly how much money you can expect to receive each and every month under certain conditions once you retire.
You'll usually have three choices:
1.If you're married, you can get a higher monthly amount guaranteed to you for the rest of your life if you agree to have the payment end upon your life. [Life Only]
2. You can take a little less each month and have that benefit paid to your spouse for the rest of your spouse's life. [Joint and Survivor ]
3. You can have the payment guaranteed at no less than 10 or 20 years. [Period Certain].
Regardless of which option you chose you have just purchased a single premium immediate annuity from an insurance company with the money that was previously in your retirement acct. You'll sign the papers and your first monthly guaranteed payment will start within a few weeks.
Congratulations, you've just made one of the most common retirement mistakes.
What you should have done instead is take option No. 4, usually not mentioned, which is to request a total withdrawal into your own rollover IRA. In this manner you can do the following:
Call several insurance companies and give them the exact dollar amount in your rollover and ask them for the figure for each of the three above-mentioned options they would pay. What you'll find either on your own or with the assistance of a qualified CPA or CFP is whether the amount you were given by your company's HR department was in fact the highest payout you could expect from the open marketplace. Oftentimes I find that by competitively shopping, a client can save anywhere from 10-12% and that's for each and every month for the rest of his and his wife's life.
The reason this occurs is in most cases HR administrators are just using the information from the one insurance company that they happen to be using, whereas if you're doing it for yourself you'll probably shop with a little more interest than they have, and as a result you'll probably find a far more competitive rate. The prime responsibility of human resource pension administrators is to complete their ERISA fiduciary responsibility and get you off their payroll. It's not their job to get you the best quote; that's your job.
Competition is a wonderful thing if it's used to your advantage. So realize that it's extremely important that you understand all of your options before you make any decision. When you're dealing with any retirement option within any company be aware that once you make a decision, it's irreversible.
There are several other very effective uses of a single premium immediate annuity such as providing you with a significantly greater net income than, say, a CD because of its favorable tax treatment.
Lastly if combined with a life insurance contract you may find that you are not only able to significantly increase your retirement income but you can also guarantee a greater amount of principal to your spouse and beneficiaries through a strategic option of providing your spouse with the ability to supplement and control her own retirement income.
The point is that you should consider the various options and alternatives available well before you make any retirement decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.