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Retirement Scenario #1- Both Retiree and Spouse Live Long Lives

This is a highly likely retirement scenario.  With advances in medicine, retirees and their spouses are living longer together than they ever have before.  It’s not uncommon for them to both live into their 80’s or 90’s.

If a man retires when he’s 60, this could mean that he will draw income from his pension for 25 to 30 years before he dies. If he selects a Survivor option from his pension or 401k, he ensures that if he dies first, his spouse will continue to receive income from the pension or 401k.  However, to achieve this, he must take a reduced retirement income (essentially a life insurance premium paid to the pension plan).

The amount of reduced income in most pension plans is based on two factors: the percentage of income the retiree would like their spouse to receive (100%, 75%, 50%) and their spouse’s age.

A greater percentage of income to the spouse = less income for the retiree

A younger spouse = less income for the retiree

Alternatively, the retiree could select a pension maximization strategy. He selects the Single Life option from his pension giving him the maximum pension income level and then purchases a life insurance policy outside of the pension plan for his spouse.

Keep in mind that if the retiree selects the Single Life (maximum income), he will pay higher income taxes.  This must be factored into whether a pension maximization strategy will provide more income.

When Does a Pension Maximization Strategy Provide More Income?

It provides more income, if the retiree’s net income of the Single Life option (maximum income) minus the life insurance premium and taxes is greater than his Pension Survivor option (reduced income) minus taxes:

Single Life option – life insurance premium – income taxes 

is greater than

Pension Survivor option – income taxes

If the retiree saves $1,000 per year by choosing the pension maximization strategy and lives 30 years, he will have saved $30,000 by a simple restructuring of his pension payments.

Increased Savings with Cost of Living Adjustment

If a retiree has a cost of living adjustment feature in their pension, they can maximize their income even more.  By selecting the Single Life option over the Survivor option, they can receive a higher COLA each year in retirement.  Over time, this additional income adds up and can be thousands of dollars more than they would have received from a Survivor option.

Insurability

The pension maximization strategy favors retirees who are able to obtain life insurance at a low cost.  Due to preexisting health conditions,  a retiree may not be able to obtain the necessary life insurance at all or at a cost that is competitive with the Pension Survivor option.  In these cases, the best option for them is to choose the Pension Survivor option to ensure future income for their spouse.

To learn more about the pension maximization strategy, visit our website at www.pensionmax.com.

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