Pension Maximization

You face a tough dilemma if you're in line for a pension at retirement. It could cost you and your spouse thousands of dollars and take a big chunk out of your children's inheritance. It’s called the "pension dilemma," because you may end up making a trade-off on your pension — deciding whether to take your full pension benefit and expose your spouse to a loss of benefits at your death, or taking less than your maximum benefit in exchange for continuing benefits after you die for your spouse. Fortunately, for many couples, there is another alternative. It's a retirement strategy known as pension maximization.

Why Pension Maximization?

As an example, let's say you'll be eligible for a $1,000 monthly pension benefit at retirement. That's the value of your benefit and the amount you will receive under the "single life option." The only problem is that your benefits will be paid only as long as you live. At your death, your pension benefits die with you. That's fine if you're single but not if you're married. Should you die first, your spouse not only loses you, but also $12,000 a year in income.

That's why, if you're like most married people, you will select a "joint and survivor option," which pays benefits as long as either of you are alive. Since your spouse has a legal claim to your benefits, this is the option automatically offered by law to married retirees. Before you can elect another option, you must both agree in writing.

However, the cost can be high. Though the actual number depends on a number of factors, a typical $1,000 monthly benefit could be reduced significantly. For the sake of discussion, if a "joint and full survivor option" is selected, that "single life option" benefit of $1,000 could be reduced by as much as $250. That adds up to $3,000 a year - $30,000 over a ten-year period - in lost benefits.

Pension Maximization: The Concept

Purchase a sufficient amount of permanent life insurance on yourself prior to retirement, naming your spouse as beneficiary. The death benefit is informally earmarked to replace the lost pension benefit if you die first.
At retirement, you and your spouse opt to take the single-life benefit option — receiving your maximum pension benefit for as long as you live.
Use a portion of the additional pension funds — the difference between the amount for a single versus a joint and survivor benefit — to pay the life insurance premiums.

Pension Maximization: The Benefits

You receive the maximum pension benefits to which you are entitled.
Your spouse shares in your benefits. Should you die first, even though your pension stops, your spouse's income continues in the form of insurance proceeds. In fact, if you like, these insurance proceeds can be set up as an annuity — with income benefits guaranteed for life.
Should your spouse die first, your benefits will continue. The life insurance can be cashed in or the beneficiary changed.
Cash values accumulate in your life insurance policy. If you and your partner live well into your golden years, the insurance can protect other assets for your heirs. In fact, no matter what happens, your estate can be protected, enabling you to pass assets onto your children, grandchildren, or a favorite charity.

Understanding Your Benefit Options:

Single Life Option
Benefits continue for as long as the benefit recipient lives, whether the recipient lives to age 66 or 106. This option pays the maximum monthly benefit amount.

Joint and Full Survivor Option
The same amount of benefit is paid for as long as either recipient is alive. However, that benefit amount will usually be lower than under the single life option. (Example: A single life benefit of $1,000 a month may be reduced to $750 a month under the joint and full survivor option.)

Joint and Reduced Survivor Option
Initial benefits are higher than under the joint and full survivor option, but then continue after the death of one person at a reduced level, generally 50 percent. (Example: Joint benefit may be $850, continued at $425 a month to the survivor.)

Is pension maximization right for you?

That depends. There are many factors that need to be taken into consideration, including both your ages, health status, actual pension benefit, and costs. Still, you owe it to yourself and your spouse to find out more.