If you’re planning to retire and would like to have a source of income each month, you might consider taking some of the savings built up in your retirement account and converting it to a pension.
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Using a pension as a source of monthly income can help cover daily expenses in retirement, so what do you need to know about creating one? Here’s how you can start converting retirement savings into a personal pension.
Withdraw Funds From an IRA or 401(k)
Once you hit age 59 1/2, you can use the money in your IRA or 401(k) any way you wish. Mark Henry, founder and CEO of Alloy Wealth Management, recommends taking the required minimum distributions (RMDs) from your IRA or 401(k) and putting them into a pension plan.
“You will pay income taxes on any money you withdraw from a 401(k), but not if you use it to fund your personal pension,” said Henry.
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Use a Single Premium Immediate Annuity (SPIA)
Mike Hunsberger, CFP and owner of Next Mission Financial Planning, said you can create your own pension using a single premium immediate annuity (SPIA).
“These are usually the cheapest, most easy to understand annuity product,” said Hunsberger. “In essence, you are giving an insurance company a one-time sum of money and they agree to pay you a set amount on a monthly or quarterly basis. The payout can either be the same across your lifetime or have a predetermined increase each year.”
Can Your Employer-Sponsored 401(k) Roll Over Into a Pension?
The answer to this question varies depending on your employer. Henry recommends checking to see if it’s an option to roll your employer-sponsored 401(k) into a pension. If the option is available, you may look into any next steps required in the process.
Place Retirement Savings in a Vehicle Mimicking a Pension
Those approaching retirement who don’t have access to a pension may consider placing some of their retirement savings into a vehicle that mimics a pension. Jonathan Price, national retirement practice leader and SVP at Segal, said the service you choose should include four factors:
- Security of the benefit and provider
- Tax efficiency
- Cost
- The right type of payment options
Work With a Financial Professional
Whether you’re shopping around to find the best pension plan or considering an annuity or another vehicle mimicking a pension instead, you want a plan that works best for you rather than choosing the first available option. Henry recommends meeting with a trusted financial professional and letting them guide you, and your unique situation, in the right direction.
Why Have a Pension in Retirement?
There are a few benefits to having a pension in retirement. One is peace of mind. By creating a pension, you’ll have a steady stream of monthly income that can be used for daily expenses covering unexpected emergencies. This frees retirees up to enjoy their retirement and not spend it stressed out about money.
There’s also a financial benefit for you and your family. Retirees with pensions have a steady income for the rest of their lives. If the money in your pension runs out when a retiree is still alive, Henry said you’ll continue to receive the same monthly check. If there’s money left over after your death, it can be passed down to your family.
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This article originally appeared on GOBankingRates.com: Experts: How To Convert Retirement Savings Into a Pension
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