PENSION MAXIMATION

Neal A. Deutsch, CFP^®

Published in Rivertown Journal, June 2007

Usually a year or so before retirement, we begin to focus our attention to the retirement choices available to us with regard to how we want to receive our pension benefits. With a 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 usually to the employee’s family advantage, but to the employer and fiduciary.

It is important to be aware that regardless of the payout choice, the pension payments will stop when both spouses are deceased. The only exception to this rule is if the multi-year guaranteed option is chosen at which time the payments will continue to the deceased estate for a stated period of time. (Let’s set this rarely used option aside in this example). 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 the paying institution will retain all remaining principal. 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. The key here is that at no time, will the pension principal pass to your children or heirs.

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 Single Life, full payout option and uses the difference between the two options to purchase a permanent life insurance policy. Although with the Single Life option the pension benefit ceases with the death of the retiree, the life insurance death benefit is invested to create a cash flow for the surviving spouse. 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. This 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 60-65 years old. Additionally, if the insurance is applied for at an earlier age, the premiums will be presumably lower, as life insurance rates are based on age and health at the time of application. Speak with your Certified Financial Planner™ to look at your pension projections as early as possible to see if this pension strategy is applicable for you, and how you may utilize it in your retirement planning.

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