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Maximizing Pension Options
Anthony B. Soldano and Larry Zavadoff CFP®
If you have a defined-benefit pension plan, it pays to learn more about options
that can provide the maximum amount of pension income while you are alive
and provide for the income needs of your spouse and family when you’re gone.
Most defined-benefit pension plans offer multiple options upon retirement;
single-life or joint-life payout options are the most common. Should you choose
the single-life option, the monthly pension check amount will be much higher
during your lifetime, however no income is left to the surviving spouse upon
your death.
The joint-life payout option provides a lower monthly income while you are
alive, but it allows for some of the pension income (full, 75% or 50%) to
continue going to your spouse until their death. However, once the spousal
beneficiary passes away, the pension is forfeited and lost forever; it cannot be
passed on to children or loved ones.
Whether you think the joint-life option looks more attractive or not, it really
comes down to the individual needs of the family and other components of
their current financial plan. Here are some pension payout options for a retiree:
Single-Life Payout: Retiree gets $100,000 a year while living, and pension ends
upon their death with no benefit to their spouse
Joint-Life Full: Retiree gets $75,000 a year while living; upon their death, their
spouse continues to receive $75,000 a year until their death (retiree pays
$25,000 a year for life)
Joint-Life 75%: Retiree gets $85,000 a year while living; upon their death,
their spouse would get 75% of the $85,000 ($63,750 a year) until their death
(retiree pays $15,000 a year for life)
Joint-Life 50%: Retiree gets $90,000 a year while living; upon their death,
their spouse gets 50% of the $90,000 ($45,000 a year) until their death
(retiree pays $10,000 a year for life)
A Good Candidate for Pension Maximization:
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Participates in a defined-benefit pension plan - government or state employees,
teachers, police officers, firemen, union employees etc.
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Ready to plan for retirement and retirement income
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Married, with a desire to protect their spouse and family
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Healthy enough to get life insurance coverage or convert existing coverage
An Alternate Solution to the
Single-Life Option:
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When you choose the single-life option, rather than
a reduced joint and survivor benefit, you can use all
or some of the difference between the amount of the
single option versus the joint and survivor benefit to
purchase life insurance. The goal is to ensure the right
amount of permanent insurance coverage is used to
take the place of the lost pension benefit, should the
retiree die first.
As illustrated under the joint-life options, the amount
of income forfeited annually is substantial. The funding
of the life insurance for the single-life option would
come from the difference being given up if the retiree
were to choose a joint-life option; more often than
not, the insurance costs less than what is being given
up by electing a joint-life option.
$120,000
Savings
$100,000
$5,000
$20,000
$80,000
Insurance
Premium
$60,000
$100,000
$40,000
$75,000
n
n
n
n
Insurance benefits can also be set up as an annuity
with income benefits that are guaranteed for the life
of the beneficiary
Life insurance benefits may be accelerated to help
with long-term care expenses
Should the spouse predecease the retiree, the life
insurance can be surrendered, which would increase
the retiree’s income
If the retiree chooses to keep the life insurance, the
beneficiary(ies) can be redesignated (at any time)
to their children, loved ones or a favorite charity,
which would create a tax deduction
A pension can be structured to pass on to other
generations, unless the joint-life option was chosen,
in which case the pension ends with the passing of
the retiree and spouse
Next Steps:
The pension option you choose has a tremendous
impact not only on the income and quality of life you
have while you’re alive, but also on the legacy you
leave for your family. There are many planning factors
that should be considered before choosing your
pension option.
$20,000
$0
Single Life Income
n
n
n
Joint Life Income
Retiree receives the maximum pension benefits to
which he or she is entitled; the spouse shares in the
benefits of having more money while they are both
alive
Should the retiree pass away first, the pension will
stop, but the spouse’s income continues via the
insurance proceeds, similar to the joint-life option.
The life insurance can be paid to a beneficiary in
a lump sum, which will allow for more flexibility
should the spouse need to liquidate a mortgage or
other debt items
Life insurance death benefits are received incometax-free
You should consult with an insurance and financial
services professional who has the expertise in this
area to help you decide which option makes the most
sense for you, and the goals and dreams you have for
your family.
The Evolution Group is a full service Insurance, Tax & Financial
Planning firm. Our suite of products & services serve both individuals
and businesses with a focus on protection, savings & growth strategies.
We have vast understanding of the financial needs of government,
state and civil service workers and develop comprehensive plans that
focus on pension, tax and retirement planning strategies. Our goal
is to help you protect, preserve and manage your wealth. We will
keep you focused on where you want to go, advise you how to get
there, and continually remind you of the importance of maintaining a
disciplined approach to realizing your dreams.
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