Financial Literacy

When leaving a job or approaching retirement, deciding what to do with your pension is a crucial financial choice. Many companies offer the option to take a lump-sum payout instead of waiting for monthly payments in retirement. While a traditional pension provides steady income, rolling over a lump sum into an Individual Retirement Account (IRA) or a Fixed Indexed Annuity (FIA) can offer flexibility, growth potential, and inflation protection. Here’s why rolling over might be the smarter choice for your retirement goals.

1. Understanding Where Pension Funds Are Typically Invested

Most pension funds prioritize low-risk, stable investments to ensure consistent payouts. Here’s a look at a typical pension fund’s allocation:

• Government and Corporate Bonds: Bonds often make up 40-50% of pension portfolios, providing steady income but usually yielding around 2-4%.

• Equities (Stocks): Around 30-40% of pension funds are in blue-chip stocks, offering stability with returns of about 5-7%.

• Alternative Assets: Some pensions invest in real estate or private equity for added diversification, though this is typically limited to manage risk.

As a result, pension funds generate modest returns, usually around 3-5% annually. While this approach ensures stability, it also limits growth potential, which makes rolling over into an IRA or FIA an attractive alternative for those seeking flexibility and the chance to grow their retirement savings.

2. IRA Rollovers: Access to Broader Investments and Higher Growth Potential

Rolling over a pension into an IRA opens up a wide range of investment options, offering the potential for greater returns. Here’s how a pension’s returns compare with an IRA:

• Pension Plans: Typically yield conservative returns of 3-5%, focusing on stability over growth.

• Balanced IRA Portfolio: A diversified IRA (e.g., 60% stocks and 40% bonds) historically averages around 6-7% annual returns, striking a balance between growth and risk.

• Stock Market Performance: The S&P 500 has historically averaged about 10% annually, allowing for higher long-term growth potential in an IRA.

With an IRA, you’re in control of your portfolio and can adjust investments over time. This flexibility allows you to align your strategy with your retirement goals, potentially boosting your savings significantly.

3. Fixed Indexed Annuities (FIAs): Growth Potential with Downside Protection

Another option is rolling over your pension into a Fixed Indexed Annuity (FIA), which provides growth opportunities linked to a market index (such as the S&P 500) with protection against losses. Here’s how FIAs work and why they’re a compelling choice:

• Principal Protection: FIAs protect your initial investment, ensuring you don’t lose money if the market declines, ideal for risk-averse investors.

• Growth Opportunities: FIAs offer returns based on a portion of an index’s performance. For example, if the S&P 500 gains 8% in a year, your annuity may grow by 4-6% depending on the terms.

• Tax-Deferred Growth: Like IRAs, FIAs grow tax-deferred, allowing your savings to compound without taxes until withdrawal.

• Income Options: Many FIAs offer guaranteed lifetime income riders, which can serve as a steady retirement income stream, similar to a pension.

FIAs are appealing for those who want growth potential without risking their principal, balancing growth with a safety net.

4. Protection Against Inflation

IRAs and FIAs can help safeguard against inflation in ways traditional pensions may not. Here’s how each option helps preserve purchasing power:

• IRAs: Investments like stocks in an IRA tend to outpace inflation over time, helping your savings keep up with rising costs.

• FIAs: FIAs provide inflation resilience by offering index-linked growth, which can help preserve the value of your savings, even if capped at a certain rate.

Having this inflation protection is especially important as fixed pension payments may lose value over time.

5. Legacy Planning Advantages

Traditional pension benefits usually end upon the retiree’s death, but rolling over to an IRA or FIA provides opportunities for legacy planning:

• IRAs: IRAs allow you to name beneficiaries, passing any remaining balance to loved ones and creating a lasting financial legacy.

• FIAs: Many FIAs also offer a death benefit to beneficiaries, adding flexibility that traditional pensions may lack.

Making the Right Choice: IRA or FIA?

Deciding between an IRA and an FIA for a pension rollover depends on your retirement goals, risk tolerance, and desired level of involvement in managing your investments:

• IRA: IRAs offer greater growth potential through a wide range of investment choices. However, they also come with the possibility of losing value if the market performs poorly. Additionally, IRAs can be subject to market volatility, which might impact returns. Self-management is another factor to consider—while it allows control and flexibility, it requires time and knowledge to make effective investment choices.

• FIA: Fixed Indexed Annuities, by contrast, provide growth potential with downside protection, ensuring that your principal is safe even if the market declines. FIAs are less susceptible to market volatility due to their guaranteed principal and capped growth. Additionally, FIAs generally require less active management, as the returns are tied to an index with protections built in. These features make FIAs appealing for conservative investors who want a stable retirement option without needing to constantly oversee their investments.

Next Steps and Considerations

Rolling over a pension lump sum is a significant decision. Here are some key considerations:

• Review Pension Performance: Before making a decision, evaluate how your company’s pension has been performing historically. Understanding the fund’s average return and asset allocation can help you compare it against the potential growth of an IRA or FIA. If your pension’s returns are modest or underperforming, a rollover to an IRA or FIA may offer better long-term growth and higher retirement income.

• Market Risk (IRAs): IRAs offer higher growth potential but are subject to market fluctuations.

• Tax Efficiency: Direct rollovers avoid immediate taxes, but consulting a financial advisor ensures tax-efficient planning.

• Fees and Costs: Be mindful of management fees in IRAs and surrender fees in FIAs. Understanding these costs can help you make the best choice for your financial future.

At Treassurance Financial Group, we specialize in helping clients explore rollover options and create retirement plans that align with their goals. Reach out to us today to learn more about IRAs, FIAs, and other options for maximizing your retirement. Let’s discuss how rolling over your pension might be the smarter move for your future.