Your pension, if applicable, Social Security, and other retirement accounts are likely to be your main sources of income in retirement. It is important to understand these plans and the income distribution options available to you.
Defined Benefit Plans
For defined benefit plans offered through The Church Pension Fund, your monthly retirement benefit is determined by your years of Credited Service, your compensation earned and assessments paid, and the survivor’s benefit option you choose for yourself and/or a spouse or other beneficiary. As an example, you may wish to reduce the amount of the monthly benefit paid to you during your lifetime in order to provide your eligible spouse or eligible beneficiary with a certain monthly benefit after you die. See Survivor’s Benefits for details.
You are not required to begin drawing your Social Security benefit when you reach your full retirement age (FRA). You can choose to start receiving your benefit earlier or later.
- You can take a reduced benefit as early as age 62.
- You can take the benefit after your FRA. Your benefit will increase automatically by a certain percentage from the time you reach your full retirement age until you start receiving your benefits or until you reach age 70. The percentage varies depending on your year of birth. For example, if you were born in 1943 or later, 8 percent a year will be added to your benefit for each year you delay signing up for Social Security beyond your full retirement age until age 70.
- In addition, you should consider the amount of your spouse’s benefit and when it is most beneficial to start drawing his or her benefits.
Talk to your financial advisor or contact Social Security at (800) 772-1213 and discuss what options might be appropriate for you.
Defined Contribution and Other Qualified Plans
The balance of your defined contribution retirement plan (such as the Lay DC Plan, RSVP, or 401(k)) or IRAs is available to you in full when you retire. The choices you make regarding the timing and amount of withdrawals can impact the long-term balance of your accounts and how much in taxes you owe.
- Even if you are still working, you can make withdrawals beginning at age 59½ without a tax penalty for early withdrawal.
- By April 1 following the calendar year you reach age 70½ and each following year thereafter, you are required to withdraw a minimum amount from your account. This is called a required minimum distribution (RMD). If you do not withdraw the RMD, you may be charged a substantial tax penalty. See www.irs.gov for a schedule of RMD amounts. Search for “Required Minimum Distributions.”
Some of the options available for distributions include those shown below. Be sure to talk with your financial or tax advisor to select the best option or options for your situation.
Take a lump-sum payment of your entire balance
- If you are at least age 59½ (or 55 and retired), you can take a lump-sum distribution. However, you will owe taxes on the full amount of the distribution, and you may incur a large tax bill.
- If you roll your account balance over to another tax-advantaged account such as a 401(k) or IRA, you may not owe taxes on the withdrawal. You will, however, owe taxes when you withdraw the money from the rollover account. Be sure to contact your plan administrator for details.
Take periodic distributions
- Each year, you can withdraw funds as needed from your account. Depending on market conditions, keeping your withdrawals around 3-4% of the value of your portfolio may help leave your principal intact. In the years that your account earns more than 3-4%, you might be able to withdraw more; in the years your account earns less than 3-4%, you may need to withdraw less.
- After you reach age 70 1/2, be sure that you meet the required minimum distribution each year. You can always reinvest money that is not needed for expenses that year.
Converting to an immediate annuity
- An annuity provides stable cash flow and can be structured to provide income for a certain period of time or for your and your spouse’s lifetime. Converting all or a portion of the balance of your retirement savings account(s) to an immediate annuity can provide income security.
- While having a guaranteed stream of income may give you peace of mind, be sure to talk with your financial planner to see if the costs of purchasing an annuity fit into your retirement financial plan.
- If you have enough monthly income from a defined benefit plan and Social Security (essentially two annuity sources), converting all or part of your retirement savings account to an annuity may not be in your best interest. With an annuity, you will not have immediate access to your funds and may reduce your flexibility to withdraw additional money. For example, if you want to take a trip around the world or need to put a new roof on your home, you’ll want access to your savings to pay your expenses. If your savings are locked into an annuity, you may have to pay a penalty to withdraw the funds.
- If you wish to purchase an annuity, it’s best to research the sales agent and their company at brokercheck.finra.org. This site may provide you with insight about the reputation of the agent or company, but it is not a guarantee.
Distributions from a Roth IRA
- There are certain rules associated with distributions from a Roth IRA account. If general, if you are over age 59½, and have had the Roth IRA account open for at least five years, distributions are not subject to income tax or an early withdrawal penalty. Plus, you are not required to take minimum distributions. Regular Roth IRA contributions (e.g., versus a rollover) can be withdrawn at any time.
Retirement Spending Calculator
- The CPG Retirement Savings Spending Calculator helps you determine the amount of money you can withdraw from your retirement accounts to help meet your expenses in retirement. You can also include any pension and Social Security income for a full picture of your income in retirement.
Tips & Resources - Income In Retirement
Your Social Security benefit might be taxable, depending on your income. Talk with your tax advisor.
Remember, distributions from qualified retirement plans are considered taxable income. Clergy may be able to declare their distributions from the RSVP 403(b) plan as housing, up to IRS applicable limits.
Annuities are offered by Church Life Insurance Corporation, 19 East 34th Street, New York, NY 10016.
This material is for informational purposes only and is not intended as investment, tax, financial, legal or other advice. Your personal decisions should be based on the recommendations of your own professional advisors.
Unless otherwise noted, websites referenced herein that are outside the www.cpg.org domain are not associated with The Church Pension Fund and its affiliates (collectively, the Church Pension Group) and the Church Pension Group is not responsible for the content of any such websites.