One of the biggest benefits decisions you’ll make is how to take your UC Retirement Plan (UCRP) benefit when you retire.
You can retire and receive UC benefits any time after you become eligible—that is, when you have at least five years of UCRP service credit and reach age 50 or 55, depending on your member tier or classification.
You can choose to take your UCRP benefit in monthly payments for life or, if you are in the 1976 tier or part of certain groups in the 2013 tier, as one lump sum.
The decision about which option to take can be complex and should be researched thoroughly. Here are some key differences to consider.
UCRP’s normal form of payment is monthly retirement income, which means you will receive a set amount every month from your retirement date through the rest of your life. UCRP also offers options for disability income as well as death and survivor benefits.
- What you get is a steady, predictable income, without having to worry about whether your money will last until you die. When you die, your surviving spouse or domestic partner automatically receives 25% of your monthly retirement benefit. Or you can choose to receive a reduced benefit over your lifetime so you can provide additional lifetime benefits to your spouse, domestic partner, or another loved one. Of course, you will pay taxes on your payouts.
- On the downside, although monthly UCRP benefits are normally eligible for an annual cost-of-living adjustment (COLA) based on a Plan formula, it may not keep up with inflation over time.
If you opt for a lump sum, you forfeit all other retirement, survivor and death benefits, as well as retiree insurance, in exchange for a cash payment now. Remember that this option is only available if you are in the 1976 tier or part of certain groups in the 2013 tier.
- This option gives you flexibility: You can invest it yourself and seek growth to help your retirement income keep pace with inflation. If you roll over a lump sum into your UC 403(b) or 457(b) Plan account, you won’t have to pay taxes on the money until you begin withdrawals. You can tap the cash in case of an emergency. And if you have assets remaining at your death, you can leave them to your heirs.
- The hitch is that you are responsible for making the funds last throughout your lifetime. There is significant risk of outliving your retirement assets. Your investments may be subject to market fluctuation, which could increase or reduce the value of your money and the income you can generate from them. If you don’t roll your lump sum directly into the UC 403(b) or 457(b) or another employer plan or IRA, you will pay taxes on the money and you may be pushed into a higher tax bracket.
- And, perhaps most importantly, if you are eligible for retiree health care, you give up your eligibility for UC-subsidized retiree health care benefits, which are only available to UCRP members who take their benefit as a monthly payment.
Making Your Choice
Whether it’s best to take a lump sum or keep your pension depends on your personal circumstances. You’ll need to assess a number of factors, including those mentioned previously and the following:
- Your retiree health care needs. To be eligible for UC retiree health care benefits, you must take your UCRP benefit as a monthly payment and satisfy a number of other conditions. If you meet all the requirements for retiree health care, this benefit is a powerful reason to take a monthly payment.
- Your retirement income and essential expenses. Guaranteed income, like Social Security and a UCRP monthly benefit, simply means something you can count on every month or year and that doesn’t vary with market and investment returns. If your guaranteed retirement income (including your income from UCRP) and your essential expenses, such as food, housing, and health insurance, are roughly equivalent, the best choice may be to keep the monthly payments because they play a critical role in meeting your essential retirement income needs.
- Longevity. Both the UCRP monthly payments and the lump sum amount are calculated using actuarial factors that take into account your current age, mortality tables, and interest rates. But these estimates don’t take into account your personal health history or the longevity of your parents, grandparents, or siblings. If you expect to have an above-average life span, you may want the predictability of regular payments. Having a payment stream that is guaranteed to last throughout your lifetime can be comforting. However, if you expect to have a shorter-than-average life span because of your family medical history or personal reasons, the lump sum could be more beneficial.