by Rich Schlueter

As retirement approaches, many employees are faced with a difficult decision, one that will affect them and their spouses for the remainder of their lives.

The decision I am referring to is the irrevocable election you must make when determining how your defined benefit pension will be paid to you. Will you elect a benefit that pays during your lifetime only? This will provide the greatest benefit, but what happens to your spouse when you die? Will you elect a payment structure with a survivor benefit and, if so which one: 25%, 50%, 75%, 100%, period certain, etc. Each of these options will reduce your benefit but will provide for your surviving spouse.

Before selecting an option, I encourage you to consider one additional planning idea, often referred to as pension maximization.

Pension maximization analysis is the exercise of determining whether a combination of electing the largest pension benefit (your life only) and purchasing life insurance is economically advantageous in comparison to electing an option with a survivor benefit.

Let’s look at an example.

Assumptions:

• Pension recipient is a male, age 65, in good health.
• Spouse is a female, age 65, in good health, and has a 20-year life expectancy.
• The life only pension benefit is $1,900/month; the 100% survivor option pays $1,400/month.
• The after-tax difference between the life-only benefit and the 100% survivor option is $400/mo.
• Effective income-tax rate is 20%.
• Assuming a 7% rate of return, an asset worth $180,575 would be required to provide your spouse with $1,400/month at your death for a period of 20 years.

Question: Are you able to purchase a $180,575 life insurance policy for a monthly premium of less than $400?

Answer: If the answer to the question is yes, then consideration could be given to electing the life-only benefit in combination with purchasing life insurance. (This is for illustrative purposes only. Please seek the advice of your professional advisor prior to making any decisions.)