When you save up money for retirement, that big chunk of savings is meant to give you a regular paycheck for the rest of your life. This monthly check is called an Annuity (your pension income).
The biggest money question you face is: Should I start receiving this paycheck right away, or wait a few years? The answer determines the size of your checks later.
Option 1: The "Income Now" Plan
This is the fastest way to get paid.
- How it works: You give the insurance company your savings today, and they start sending you money next month.
- Who should choose it: Anyone who has officially stopped working and needs money right away to pay their bills.
- The Downside: Because they start paying you immediately, the monthly paycheck you receive will be smaller compared to waiting.
Option 2: The "Bigger Check Later" Plan
This plan is for maximizing your income later in life.
- How it works: You put your savings into the plan, but you tell the company to hold off on sending checks for, say, five or ten years. During this waiting time, your money keeps growing tax-free.
- Who should choose it: People who retire early but have another source of income (like part-time work or rent) to cover their expenses for a few years.
- The Big Benefit: Because the company holds your money longer, they can promise you a much larger monthly paycheck once you finally start receiving it.
How to Decide Which Is Best for You
Think about your needs right now:
If you need money to live on right now, choose the Immediate Annuity. You need cash flow immediately to pay bills.
If you retired but are still doing some consulting work for the next 5 years, choose the Deferred Annuity. Your part-time income covers your needs now. Let your pension money grow bigger so your checks are much larger when you truly stop working.
If you want the absolute highest monthly income when you are very old (80+), choose the Deferred Annuity. Waiting is the best strategy to maximize the size of your final paycheck.
Choosing the right time to start your pension is the smart way to make sure your retirement fund lasts and gives you the highest income when you need it most.