So that you are getting ready to take the gold watch and call it a day on the last 40 years of your working life. On the way out the door, your employer dangles several appealing options regarding your monthly pension benefit. Stop! Don’t make a move until you’ve carefully considered the issues and implications for each option. You may simply find that you have options that you we hadn’t considered when it comes to your pension benefit.
Should you decide to take the lifetime pension option, you now must choose between one of many payout options. If you are single, the option is simple. Take the single-life payout choice in order to secure the highest monthly life time income. But if you are married, it gets more complicated. Should you take the greatest payout that ends at your death with no residual pension benefit for the spouse? Choose this option, and your wife could be left out in the cold with nothing after you’re gone, and struggle to pay the bills the rest of her living. If, on the other hand, you choose the option that gives 100% survivor benefit, you sacrifice a large chunk of your monthly monthly pension check. But here’s another potential problem that you may not have considered. Statistically speaking, most husbands die prior to their wives. But what if your wife dies first, and you have chosen the best payout with 100% survivorship underneath the assumption that you would be the first to visit? You have now sacrificed the added pension benefit that you could have received for that remainder of your life. Sadly, there are no “do-overs” when you make your decision. Bet a person hadn’t thought of that, had you?
Just when things were obtaining complicated, your employer throws one more curve ball at you. Instead of taking a lifetime pension benefit, this individual offers you a lump sum of money rather. This has become increasingly popular with businesses for reasons we’ll discuss later on. Should you take the money & operate? Or should you take the easy way out, and go with the monthly paycheck for life? After all, this is the closest factor to the security of a paycheck as you were working.
And you thought retirement was going to be easy, didn’t you? Heck, this is too much like function. Rather than get all wrapped around the axle, let’s break down the issues and bring a little clarity to your choices.
SURVIVORSHIP OPTIONS – First, let’s consider the survivorship options, and see when there are some alternatives available to you. Quite often, you can find more survivorship options given by your employer than the ones mentioned here, but we’ll confine ourselves to these basic options for simplicity’s sake. First, your employer has offered the single-life with zero survivorship choice. Taking the single-life option ensures the best payout while you are living, but nothing for your spouse at your death. On the other hand, choosing either a limited (25-75%) or complete (100%) survivorship option means possibly sacrificing a significant amount of monthly earnings for you. To add insult to injury, you may penalize yourself if your spouse dies before you. Perhaps there is a 3rd way. As a matter of fact, there is. It is called pension maximization, or pension-max, regarding short.
Under pension-max, you opt for either no survivorship or limited survivorship options, then take the added quantity over what you would have received for the completely survivorship option, and purchase life insurance upon yourself so that your spouse can then get either a lump sum or annual dying benefit to make up for the dropped residual income at your death.
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For instance, let’s assume that your full benefit with no survivorship option is $1,5k per month. On the other hand, the payout for your 100% survivorship option is $750 per month. Under pension-max, you opt for the first option, then take the added $750, or some lesser amount, based on your age & health to purchase a death benefit that will replace the particular lost pension income at your passing away.
Before choosing the pension-max choice, it is vitally important that you talk with a financial consultant who can help you crunch the figures in order to determine if this will benefit a person & your spouse. There are several important factors to consider that may determine if this strategy makes financial sense for you, including your age, health & insurability, the age & health of your spouse, along with the life expectancy of both you & your spouse. Do you have good genes? Did your own extended family members live long lives, or did they die prematurely from some inherited condition which is likely to affect how long either you or your spouse are likely to live? In addition , you need to consider the cost of insurance, your own tax bracket in retirement many years, and whether any health care benefits from your employer are tied to your own pension. These are things that an experienced economic professional can help you sort out.