Finance and Business
Browser Extensions That Save You Money
Playoff Perks For Pro Athletes
6 Financial Benefits Of Spring Cleaning
How The 2014 Obama Budget Could Affect Your Finances
How To Profit From Risk
What Buffett Would Say To The 50K’ers
How Spring Cleaning Can Make You Money
The Most Expensive Sports Trophies
How To Buy Annuities (And When Not To)
The Economics Of Stay-At-Home Moms
6 Tips For Selling Your Home Fast
6 Things You Think Add Value To Your Home - But Really Don't
Making It Big On Wall Street
Predict Inflation With The Producer Price Index
10 Great Summer Jobs For Teens
The Cold, Hard Facts Behind Funding Your Retirement
The Role Of Parents In Financial Education
Broker Commissions Are Here To Stay
Money Tips To Stretch Your Retirement Nest Egg
4 Traits Banks Look For In New Staff
Earnings Guidance: Can It Accurately Predict The Future?
Is Real Estate Ever A Wise Investment For Retirees?
Get A Bank Job In 50 Days
The Diner's Guide To Tipping
The Pros And Cons Of Pension Maximization
Government employees who have put in at least 20 years of service can look forward to guaranteed monthly pensions when they retire. Married retirees, however, must also choose whether to receive single or joint life payouts. The latter option guarantees that after the death of the retiree, the spouse will receive a percentage (usually about half) of the retiree’s original monthly benefit for the rest of his or her life. This is definitely the best choice for retirees in some cases, but not always. Employees who are about to retire and have been informed of their exact monthly retirement benefit would be wise to explore their options using a pension maximization analysis.

What is Pension Maximization?
As the name implies, this strategy is simply a cash flow analysis that is used to determine whether a retiree’s pension dollars can be stretched further with the purchase of a life insurance policy. The goal is to replace the spousal payout from the pension with a death benefit that will at least equal the amount that would have been paid out on an after-tax basis following the death of the retiree. The retiree chooses to receive the single life payout and uses the differential dollar amount between the single and joint life payout to purchase permanent life insurance.

Fred has worked as a government employee for 25 years and is retiring in a few months. His single life payout from his pension is $6,000 per month. His joint payout would be $4,900 per month. He opts for the single life payout and uses the monthly $1,100 differential to purchase a $200,000 indexed universal life policy on himself with his wife as the beneficiary.

Pros and Cons
The cost of survivor benefits in most pension plans is very expensive. Many retirees face a reduction of up to 10% of their pension payouts in order to carry this protection. Pension maximization can be an excellent option for some retirees, but there are several issues that must be carefully considered before using this strategy, as inadequate planning in this area can have disastrous results in some cases. The key factors that are used in pension maximization analysis include:

The ages and projected longevities of the retiree and spouse
The health and insurability of the retiree
The dollar difference between the single and joint life pension payouts
The couple’s tax bracket and financial situation
Whether health insurance benefits are tied to the pension

Each of the factors listed above can have a substantial impact on whether pension maximization is the right choice. If the retiree is not medically insurable, then obviously it cannot be done. For this reason, an employee who wishes to pursue this option may be wise to purchase the policy at a younger age when premiums are lower. It is vitally important, however, to keep the policy in force and not let it become underfunded. If the policy has lapsed when the employee begins receiving a straight life payout, then the spouse may receive little or nothing after the employee’s death. Health insurance is another critical factor. If health insurance benefits will cease with the pension payout, then this is a very bad idea unless the surviving spouse has access to similar coverage elsewhere. For this reason, retirees whose health benefits are tied to their retirement pensions should probably never use this strategy unless their spouses also already have a pension of their own that provides them with their own health coverage. Replacing this coverage for surviving spouses is usually cost prohibitive and may be impossible.

Running the Numbers
If pension maximization is still a viable option after these issues have been considered, then the strategy essentially becomes a time value of money equation. The ages of the couple are used to determine the amount of insurance that will be needed along with the amount of the survivor’s pension. Of course, one of the trickier issues that must be accounted for is the difference in the amount of money that will be needed if the retiree dies sooner rather than later. If the retiree is considerably older than the spouse, then a larger benefit will be needed if the retiree dies soon after the pension payout begins. For example, assume that Fred from the previous example is 66 when he begins taking his pension and dies two years later. His wife is 48 and is projected to live for another 40 years. The joint payout would yield a total of $2,352,000 over the remainder of her lifetime (40 x 12 x $4,900). Replacing this much income with permanent life insurance will most likely be cost prohibitive for Fred. Using term insurance may be a wiser option, as it is usually cheaper than permanent coverage and the need for this protection may eventually disappear. A level term policy with decreasing protection may be a wise solution for Fred, who might be able to afford the premiums on coverage that is at least equal to perhaps half to two-thirds of the survivor benefit if he is in good health. (Fred would also be wise to purchase this policy when he is younger.)

Of course, if the spouse dies first, then the retiree can access the cash value in the policy for him or herself or may choose to let it lapse. This is one of the largest advantages of pension maximization, because once the survivor benefit is chosen, it cannot be reversed or changed if the spouse dies first. The retiree can only receive the lesser benefit for the remainder of his or her life.

Tax and Investment Considerations
A thorough pension maximization strategy will take the couple’s tax bracket and other retirement and investment assets into consideration. Pension income is always fully taxable, so in many cases the minimum amount of coverage that is purchased only needs to equal the after-tax stream of income that is collected. For example, Fred in the previous illustration may only need to purchase $1.5 million dollars of coverage that is then invested conservatively in order to replace the after-tax income that would be paid under the survivor’s benefit. And if the couple has substantial assets housed in IRAs or other retirement plans, then only a partial replacement of benefits may be necessary. A death benefit that equals the couple’s remaining debt may also be a practical limit. If the surviving spouse is not financially adept and does not want to deal with the ongoing tax and other issues that come with a pension payout, then a lump sum of cash that can be used to retire the mortgage and other obligations may be a sensible alternative.

The Bottom Line
Pension maximization can be an effective solution to the single versus joint life payout dilemma that many retirees face. Care must be taken, however, to ensure that the surviving spouse is guaranteed to receive an insurance benefit that will meet his or her needs, and thorough analysis is generally necessary in order to make a fully informed decision. Those who eschew professional help can use one of the sophisticated programs available for consumers; these break down all possible pension scenarios on a year-by-year basis and show what could happen if various events occur, such as the retiree or spouse dying in a given year with the maximization strategy versus without it. Consult your financial advisor for more information on pension maximization.


How Much Should You Have In Your 401(k) To Retire?
Consequences Of Maxing Out Your Credit Card
Use Caution Trading Pink Sheet Stocks
New Tax Rules Target The Top Tax Bracket
Top 4 Most Competitive Financial Careers
The Best Entry-Level Finance Jobs For 2013
5 Ways To Increase Your Chances Of Getting A Job After College
Is Higher Education Still A Good Investment?
Why You Shouldn't Worry Too Much About New Student Loan Rates
How To Make $1 Million In Finance
Why Clients Fire Financial Advisors
Share 0 Disqus 6 Tough Questions To Ask Before Retirement
Retail Banking Vs. Corporate Banking
How To Be A Top Financial Advisor
The Basics Of A 401(k) Retirement Plan
How To Write An Effective Investment Banking Resume
The Benefits Of An Accelerated Bachelor's/Master's Degree
How Long Will You Work When You Should Be Retired?
The Importance Of Work Experience For Students
8 Clear-Cut Ways To Becoming A Better Saver
The Pros And Cons Of Pension Maximization
Top Business And Finance Degrees For 2013
Will 2014 Mark The Return Of The CD?
How Summer Businesses Survive
Social Finance Careers: Creating A Better World
How To Match Your Savings Goal With Investments
Investment Tax Basics For All Investors
Should You Borrow Money To Make Investments?
5 Secrets Credit Card Companies Don’t Want You To Know
What Determines Your Cost Basis?
Should You Buy An Annuity?
When To Buy A Mutual Fund
How Financial Advisors Are Leveraging Social Media
Maintaining Work/Life Balance For Financial Professionals
5 Financial Gifts Dad Really Wants
The Father's Day Index 2013: Dad’s Value Is Up!
Networking For Financial Professionals: Maintaining A Strong Industry Presence
4 Reasons Why Your Credit Card Company Thinks Your Card Is Stolen
Can Financial Education Rebuild America’s Economy?
4 Ways To Take Your Career To The Next Level
The Hidden Fees In 401(k)s
Is It Foolish To Strive For The American Dream?
5 Easy Fixes For A High Summer Electric Bill
Commuters' University: On-The-Road Learning
What Is The Federal Employees Retirement System (FERS) And How Does It Work?
Summer Money-Making Opportunities For Finance Students
Unexpected Challenges For Self-Employed Finance Professionals
3 Financial Tasks We Think Are Harder Than They Really Are
How To Survive When Prices Double Every Day And A Half
5 Budget Tips For Your European Backpacking Trip
The Financial Fallout Of The DOMA Repeal For Same-Sex Couples
5 Overused Resume Phrases