Maximizing Your Pension

When you’re approaching retirement age, you not only worry about replacing your income but also ensuring that your spouse is taken care of should you pass.  For those people who have a traditional pension plan, also known as a defined benefit plan, they have a difficult decision to make as they approach retirement.  Should an individual receive the maximum payout of the pension plan known as a “Life Only Benefit” or should you receive a joint pension payout known as a” Joint and Survivor Benefit”, so that the payments will continue beyond the passing of the primary person?

While it is important to understand what type of provisions your pension plan has, it is also important to determine your family’s budget needs at the time of retirement.  If you believe that you may need a higher income and you are in good health then you may want to make the most of your pension plan while you are living.

One way people maximize their pension payout is to accept the single-life pension payout or “Life Only Benefit”, generally this would give the owner a larger pension amount every month while foregoing the payout to their spouse after their death.  If the primary owner chooses the “Life Only Benefit”, they should obtain a life insurance policy naming their spouse as the beneficiary.  Their spouse would receive the death benefit from the life insurance policy, tax-free, essentially replacing the pension payments that will stop at the time of the primary owner’s death.  Their spouse can then invest the lump sum of money to provide income for later years.

Prior to making any pension decision, the primary owner should determine if; they can qualify for a life insurance policy and that the life insurance policy it is an appropriate amount to cover expenses as well as invest.

Questions to ask yourself prior to taking part in pension maximization:

  •  Do you need a larger monthly payout amount at the time of retirement?
  •  Is your retirement health insurance coupled with your pension?  If so, will health insurance carry over to your spouse once you pass?
  •  Are you healthy enough to take out a life insurance plan on your own?
  •  What is your tax bracket?  Pension payouts are considered fully taxable.
  •  Will your spouse be financial stable when you pass?
  •  How long is your spouse projected to live past you?
  •  How much life insurance would your spouse need to ensure that your spouse is taken care for the rest of their life?

Benefits of selecting the pension maximization strategy are:

  •  Should your spouse predecease you then your heirs will receive the remaining life insurance benefits upon your death.  With a pension, often heirs will not receive any funding upon your death.
  •  You have financial control of how much benefit your spouse will receive upon your death by selecting the appropriate amount of death benefit from the life insurance plan.
  •  If you select the “Life Only Benefit”, you have the potential of accessing any accumulated cash values of the pension plan, such as accepting the funds as a lump sum.

 

Sources:

http://www.investopedia.com/ask/answers/09/what-is-pension-maximization.asp

http://www.investopedia.com/articles/personal-finance/071813/pros-and-cons-pension-maximization.asp

https://www.northamericancompany.com/documents/434862/5721980/NAM-1687.pdf/ccc01325-f262-44da-b40c-908817c0d894