If you are a participant in a pension plan, you will Before retirement have to decide how your benefits will be paid out for the rest of your life? It is a very daunting decision to make, and that is why it is so important to be informed of your options throughout the whole process. Should you elect to receive the maximum retirement check monthly for as long as you live with your spouse getting no benefit upon your death? Or should you elect to receive a reduced check monthly with the condition that your spouse will continue receiving income upon your death? Pension maximization is about supplementing your pension income by using life insurance as a source of funding for your spouse’s future income requirements.
Three common payout options are: The Life Only Option pays the retiree the maximum monthly income amount, but the income stops at the retiree’s death. A Joint and 50% income option pays a decreased monthly income for the life of retiree in contrast to the Life Only option, but it will continue paying 50% of the original benefit as income for the life of the surviving spouse. Lastly, a Joint and 100% Survivor option pays the lowest monthly income compared to a Life Only and Joint and 50% income options but continues paying the same monthly income for life of the retiree’s spouse. The decreased income under the 100% Joint & Survivor Income benefit option carries on until the 2nd death.
If you are married, pensions will likely mandate a joint and survivor annuity payout option for your pension benefits in order to protect your spouse or have them sign off waiving this option. This ensures that your surviving spouse will continue receiving at least half your pension income. This also means that your pension benefit is reduces for as long as you live, and if your spouse dies before you, your pension benefit cannot be restored to its unreduced amount. All pension payments stop when both you and your spouse die.
Let’s look at the results of these 3 pension benefit options using hypothetical examples:
Life Only Option:
For as long as you live, you receive a monthly pension benefit of $2,000.
If you die first, however, your spouse will receive a monthly pension benefit of $0.
If your spouse dies first, your monthly pension benefit remains unchanged at $2,000.
Joint and 50% Option:
For as long as you live, you receive a monthly pension benefit of $1,700 or about 85% of
the maximum life income option benefit.
If you die first, your spouse will receive a lifetime monthly pension benefit equal to 50% of
your benefit, or $850 per month.
If your spouse dies first, however, your monthly pension benefit remains at $1,700 and does not revert to the single life.
Joint and 100% Survivor Options
For as long as you live, you receive a monthly pension benefit of $1,500 or about 75% of
the maximum life income option benefit.
If you die first, your spouse will receive a lifetime monthly pension benefit equal to 100% of
your benefit, or $1,500 per month.
If your spouse dies first, however, your monthly pension benefit remains at $1,500.
A properly-made retirement income protection plan will enable you to receive your maximum pension benefit, maintain control and overall flexibility, and still ensure your spouse’s financial security upon your death. Look for our video that explains an approach where life insurance is combined with a single life option which could maximize your benefits if certain conditions are met.