by Richard Schlueter, Vice President – Insurance Services, Wealth Enhancement Group

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

Assumptions:

• Pension recipient is a male, age 65, in good health.
  
• 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.)