PENSION MAXIMIZATION- IT JUST MAKES SENSE!

Neal A. Deutsch, CFP^®

Published in Rivertown Journal, March 2007

During the course of our working life, those that are employed by a company that offer a retirement plan, either public or private, are supplied periodically with a pension projection statement. It is usually updated annually, but most folks relatively ignore the facts, only to look at the projected payout in that magic year of retirement. Usually, only a year or so before retirement, we begin to focus our attention to the retirement payout choices available to us with regard to how we want to receive our pension benefits.

With this myriad of choices before us, confusion sets in, and the married employee will most often take the spousal survivor option. In the unfortunate circumstance of the employee spouse passing away first, this choice allows the pension payment to pass through to the surviving spouse. While on the surface this choice seems the most logical, it is not to the employee’s family advantage, but to the employer. It is important to be aware that regardless of the payout choice, the pension payments cease when both spouses are deceased, whether they live a long, health life span or pass away a month after retirement.. In the above scenario, the employee spouse passes away first, followed by the surviving spouse. At the time of the second death, the payments will stop, and all unpaid payments will revert to the paying institution. If the retired spouse lives but a short time, the surviving retiree faces a lifetime of reduced pension benefits. If both live a full life and die within a short time of each other, little benefit is ever realized after many years of reduced benefits.

A solution to this dilemma is a process called Pension Maximization. An analysis is done to determine the difference between the Single Life option, which pays the highest monthly benefit, and the Survivor Benefit, which is most often used for couples. The retiree takes the full payout option and uses the difference between the two options to purchase a permanent life insurance policy. Although if the Single Life option is elected the pension benefit ceases with the death of the retiree, the life insurance death benefit is invested to create a cash flow. The best part of this process is that the insurance proceeds will eventually pass to the children: with either the Single Life option or Survivor Option, the pension ceases with the death of the two spouses and in no case do the children or other heirs realize benefits. The Pension Maximization strategy now allows the legacy of the retiree to pass to their heirs. Since life insurance premiums are based on the insured’s age, the best time to look at this strategy is years before retirement, not at retirement when the retiree is typically 50-60 years old. When do you look at applying for insurance for this strategy? At least 5 to 10 years before your retirement to secure your policy at lower rates.

If you are within 10 years of your retirement and your employer offers a pension payout, I urge you to speak to your planner or advisor as to how this pension strategy may be applicable for you. After all…why leave your pension to your employer if you can leave it to your kids?

Neal A. Deutsch is a Certified Financial Planner^™, Registered Securities Principal and President of Chestnut Investment Group in Suffern, NY, helping people with financial planning since 1984. Please feel free to call Neal at 845.369.0016 or email him with your questions at neald@chestnutinvestment.com Feel free to visit his website at www.chestnutinvestment.com