Transitioning to Retirement
Summary
- Retirement income may come from a pension, a defined contribution plan or other sources, and each option can involve different decisions.
- Planning before your final paycheck can help you understand when retirement income may begin and how you will cover expenses during the transition.
- Pension choices may include an annuity or a lump sum, while defined contribution plans may allow you to leave assets in the plan, roll them into an IRA or take a lump sum.
- Account valuation and plan processing can affect when retirement assets become available.
- Because some retirement decisions may be difficult or impossible to reverse, consider your needs carefully and seek qualified guidance when appropriate.
Moving from a regular paycheck to retirement income takes preparation. Before your last day at work, it helps to understand where your income will come from, when it may begin and what decisions you may need to make about retirement plan assets.
If you expect to need retirement income soon after your final paycheck, start making arrangements in advance. If you do not need the money immediately, you may have more time to consider how your retirement assets fit into your broader financial plan.
Factors to Consider Before You Retire
Your retirement income decisions depend on your circumstances. Consider your age and health, whether you need to provide for family members and what other sources of income you expect to have.
It can also help to look at your complete financial picture. A coordinated approach to wealth management can help you consider retirement income alongside your other financial priorities. If you want a clearer view of everyday accounts, spending and cash flow as you prepare for retirement, tools that help you manage your money can make those details easier to track.
Understanding Pension Plan Choices
If your employer provides a traditional pension, you may generally have two ways to receive the benefit: a pension annuity or a lump sum distribution.
With an annuity, you receive regular income for the rest of your life or, depending on the option you choose, for your life and the life of another person. Your employer calculates the payment amount using factors that may include your age, final salary and years of service. Income taxes are withheld from each payment.
With a lump sum, your employer calculates the value of your benefit and transfers the money to an account you designate. If the distribution is paid to a cash account, income taxes are withheld. If the amount is rolled directly into a tax-deferred IRA, income taxes are generally deferred until you take withdrawals from that account.
Options for Defined Contribution Plans
Defined contribution plans include 401(k), 403(b), 457 and Thrift Savings Plan accounts. Unlike a traditional pension, retirement income from a defined contribution plan comes from assets held in your name. The amount available depends on contributions, how long the money was invested and investment performance.
Your choices may include:
- Leaving your money in the plan, where available options may include systematic withdrawals or conversion to an annuity.
- Rolling the assets into an IRA.
- Taking a lump sum distribution.
When you choose an income option, accumulated investments may be sold and the resulting value used to purchase an annuity, transferred to an IRA or paid as a lump sum.
As you plan for retirement expenses, you may also want to review the role of personal savings alongside retirement plan income. Keeping short-term and long-term needs in view can help you understand which resources may be available for different expenses.
Plan for Processing Time
Retirement plan assets may not be available immediately when you decide to begin distributions or complete a rollover. Your account first has to be valued according to the plan's regular valuation schedule.
A 401(k) or similar plan may also hold the money for a period after valuation before processing the transaction. Because timing varies by plan, review your plan's procedures before deciding when you will need the funds.
Get Guidance Before Making a Final Decision
Some pension and retirement plan choices may be irrevocable, so take time to compare the alternatives before making a decision. An experienced professional can help you understand your options and consider how they fit your goals.
Your employer may have plan specialists who can explain how the plan works. You can also ask trusted professional advisers for referrals. Before working with someone, review their professional credentials and make sure you are comfortable with the guidance you receive.
The transition to retirement can involve several moving pieces. Understanding your income options, planning for timing and considering how each decision fits your broader financial life can help you approach the change with greater clarity.