Watch Out For This Retirement Blunder

Henry Montag

Henry Montag

You’re excited because today is the day you’ve been waiting for. You have an appointment with the person in your Human Resources department who will go over your retirement packet containing all of your financial information. You’ll see exactly how much money you can expect to get each and every month under certain conditions, once you retire.

If you’re married you’ll usually have the following choices:

1.   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.    Or you can take a little less each month and have that benefit paid to your spouse for the rest of their life. [ Joint and Survivor ]

3.   Or you can have the payment guaranteed at No less than10 or 20 years. [Period Certain]

You’ll then be asked to choose which of the three options you’d like. 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 account. 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 4 , usually not mentioned, which is to request a total withdrawal into your own rollover IRA.  To do this, you can do the following: call several insurance companies and give them the exact dollar amount in your rollover and ask them for their figure for each of the three above-mentioned options they would pay. Either what you’ll find on your own or with the assistance of a qualified CPA or CFP is whether the amount you were given by the Human Resource department of your company was in fact the highest payout you could expect from the open marketplace. Often times I find that by competitively shopping a client can save anywhere from 10-12% and that’s for every month for the rest of his and his wife’s life.

The reason this occurs is in most cases that the person that gave you your information is merely passing on to you what their Human Resource administrators gave them. In all likelihood they are just using the information from the one insurance company 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 the Human Resource pension administrator is for them to complete their ERISA fiduciary responsibility and to get you off their payroll. It’s not their job to get you the best quote, that should be 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 because when you’re dealing with any retirement option within any company once you make a decision its 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 also guarantee a greater amount of principle to your beneficiaries.

The point is that you should consider the various options and alternatives available to you before you make any retirement decisions.


Henry MontagCFP,CLTC
Financial Forums Inc.
516 640-1315
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