Here’s a move that might prove useful for you and your spouse.
Are you wondering
how to make the most of your pension?
If you’re thinking about which income option to take, maybe it’s time to
think outside the box. Here’s why. When most retiring public service employees
meet with a pension administrator and look over their income options, they face
an either/or question. Do they sign up for the survivor’s benefit or not?
You want to do the right thing. At first glance, it seems like a
no-brainer. If you have a spouse, of course you want the survivor’s benefit –
right? After all, this is the option that guarantees the continuance of pension
income for your spouse after you pass away. In most cases, it is
structured so that the pension income lasts for the longer of two lives.
But do you really
want to reduce your retirement income?
You may not realize that this choice carries an opportunity cost. If you
choose to distribute your pension income under a “joint and survivor”
arrangement, the monthly income you get will likely be hundreds of dollars less
than if you had chosen a “single life” distribution. The pension fund knows
that a joint life pension will almost certainly have to pay out over more years
than a single life pension, so the monthly income will have to be set lower.
Selecting the joint life option means reducing your retirement income. If you
take that option and die early, your spouse is looking at a lifetime of reduced
pensions. If you and your spouse die a year or two apart, there is little
benefit derived from the choice you’ve made. (In most cases, you can’t reverse
a pension payout option you selected years ago.) If you choose the survivor’s
benefit, you are making an insurance decision. Seriously, you are. When you
check that box, you are arranging for a cash benefit to be paid out to a
surviving spouse. A life insurance policy has the same function – and it might
be better to go get one.
outside-the-box choice that is too often overlooked. Here’s the real choice:
Should you insure your spouse’s future level of income, or should you
insure yourself? Let’s put it another way. Let’s say your spouse outlives you.
After you die, do you want your spouse to receive some taxable retirement
income, or a significant cash benefit that will not be taxed? (Life insurance
proceeds aren’t taxed, except in a few limited cases, but survivor pension
benefits are.) Before you retire, you could purchase a whole life insurance
policy in an amount that would give your spouse or your children the equivalent
of a similar monthly benefit. That whole life policy could even build cash
value over time.
Why insure your
life instead of your spouse’s future income level?
This choice makes sense on many levels. First, you increase your
retirement income by not choosing the joint life expectancy payout option. (If
your spouse should pass away before you do, this will prove an even wiser
financial decision.) Second, you have a life insurance policy that will give
your spouse financial protection in the form of a sizable death benefit if you
pass away first. Your spouse could even use the life insurance proceeds to
purchase an immediate annuity, which could then provide a lifelong income
stream. Third, if your spouse dies before you, you still have the maximum
pension while the eventual life insurance proceeds may be directed to other
beneficiaries you name on your
policy – such as your children. (Will your children inherit your pension
income? No, they will not.) Fourth, there’s a lot of uncertainty today about
the health of state and local pension funds. The less you have to worry about
that subject, the better. How would you pay for this new insurance policy?
Well, it may be easier than you think. If you select a single life pension, the
money you receive may result in income enough to live on and fund the policy.
Factors to consider. This “pension maximization” strategy makes the most sense
if you and your spouse are in good health and if you are within 10 years of
retirement. You also want to scrutinize the terms of your pension and medical
plan, and take a look at the other income and tax consequences of making this
move. By the way, this strategy is common in corporate America. It’s about time
more public service employees used it as well. I urge you to look into it, and
to discuss it with a licensed insurance professional or financial advisor.
2 advisortoday.com/200704/clientpension.html [4/2007]
These are the views of Peter Montoya Inc., not the named Representative
nor Broker/Dealer, and should not be construed as investment advice. All
information is believed to be from reliable sources, however; we make no
representation as to its completeness or accuracy. The publisher is not engaged
in rendering legal, accounting or other professional services. If other expert
assistance is needed, the reader is advised to engage the services of a
competent professional. Please consult your Financial Advisor for further
information. Neither the named Representative nor Broker/Dealer gives tax or
The Retirement Group is a Registered Investment Advisor not affiliated
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