Your Retirement . . . with Brian & Bob: Learn to maximize your pension by understanding all the options available

A substantial number of our clients found choosing the life only option coupled with a pension maximization plan most beneficial.

By Bob Price and Brian Harrigan

Planning for retirement can be exhausting. There are many uncertainties, various options, and less certainty in knowing whether you will have enough to live on. Taxes, medical expenses, inflation, and other changes in our laws can make the matter complicated.

In addition, most retirement plans offered today do not offer the guarantees once provided in traditional defined benefit plans such as pensions. For teachers, government and public employees, pension plans offer a defined monthly income benefit that is guaranteed with various payout options to choose from. Retirees elect which payout option they want before the time they are ready to retire. In general, a retiree can choose from the following payout options:

• Single life only — This payout option ends at the retiree’s time of death and does not continue to a spouse or beneficiary. This option provides the highest payout.
• Joint/Survivor — With this option, the retiree and spouse or a loved one would take less money while alive to continue to receive a monthly income stream after the retiree’s death. There are often options for what percentage of benefit (100 percent, 75 percent, 50 percent) the retiree would like to continue.
• Lump Sum Payout — The lump sum payout allows the retiree to cash out and take full control of the retirement dollars available. We do not see this option commonly taken because there are no guarantees you can manage your money with better returns than the pension fund.

Most of our clients choose the joint payout option to ensure their spouse or loved one continues to receive payouts after death.

The dollar amounts and age difference are the biggest factors when considering this alternative. For some clients, this option may be the best but not for all. You need to consider various factors like the health of your spouse, family history of longevity, and explore options for replacing any income that would be lost if you took the higher payout of the single life only option.

A substantial number of our clients found choosing the life only option coupled with a pension maximization plan most beneficial.

A pension maximization plan is a cash flow analysis that utilizes life insurance to determine whether a retiree’s pension dollars can be stretched to provide the same or more net income to their surviving loved one. If done correctly, this type of plan can provide more income before and after the retiree’s death. To properly evaluate the options, one must look at future income needs, life expectancy, and other planning objectives.

Recently we had a client come to us asking about which pension option he should choose. This client, age 63, planned on retiring at 65 and was in good health. The single life payout option gave him $7,000 per month but didn’t pass anything onto his spouse who was the same age and in good health. The joint/survivor option paid them $5,900 per month and would continue until they both had passed. Since females of equal health and age typically outlive their male spouses by five years on average, we were able to calculate the potential loss of income and choose the right option for maximizing their pension.

If this couple took the joint option, they would receive $1,100 less each month ($13,200 annually) starting at age 65. If this client passes at current life expectancy of age 82, the couple would’ve paid $224,400 to ensure the client’s monthly benefit of $5,900 passes to his surviving spouse. If she lives a normal life expectancy of age 87, she will receive $5,900 for an additional five years, or $294,000. The joint survivor option is comparable to an expensive insurance policy where $224,400 was paid to only leave a benefit of $294,000. This couple felt it was ridiculous to pay that much for that potential payout.

Rather than sacrifice $1,100 per month using the joint survivor option, they chose the life only option giving them the full $7,000 per month as income. Consequently, with proper help and analysis, the client was able to purchase a $500,000 life insurance policy for $621 per month, which would go to his spouse tax free at his death. Invested conservatively, the surviving spouse will receive the $7,000 per month for the years she outlives her husband. In addition, when she dies, the remaining unused amount of death benefit would go to their heirs tax-free.

When considering a pension maximization option, your financial professional should tailor this to your needs by considering life expectancies, the dollar difference between payouts, health/insurability, tax brackets, and whether health insurance is tied to the pension.

Robert Price and  Brian Harrigan own Executive Plan Design in Gilroy. For more information on solutions tailored to your situation, contact them at (408) 767-2572.