Nothing is ever a sure thing.
All right, forget about death and taxes. You’ll likely agree that retirement income is certainly not a sure thing.
Social Security retirement benefits aside, the closest many Americans get to achieving a stable and guaranteed stream of income in retirement is through a pension, often earned through years of service in a government or corporate entity. If you are fortunate enough to have access to a pension and you have yet to retire, I can give you a few pointers that may save you a bit of money or at least maximize those dollars when you do ease into your retirement years.
The pension trap
Let’s use Marvin’s situation to understand how a popular retirement planning technique may benefit him. Marvin is a hypothetical state employee who likes to be called “Marv” (or even “Marvel” when he’s polishing off plates of hot dogs in a contest at the county fair), and he is retiring in two months after 35 years of service.
Marv has been anxiously awaiting retirement for many years and now, with his pension options in front of him, he is getting a little panicky about making a decision that will affect his income for the rest of his life. Gertrude, his highly attentive and caffeine-ridden wife, is also concerned and adding to the mounting panic by pestering Marv about making the right decision, though she has little valuable insight into which decision that might be.
So many options
Among the plethora of income options Marv may have, let’s focus on the decision he has to make regarding the effect his own death will have on the continued pension payments to Gertrude, also known as the “survivorship annuity.”
If Marv chooses to receive 100 percent of his pension income, that will leave his spouse with no continued payments if he dies. He wants to know that his wife will be taken care of, so he gives this option little attention. Instead, Marv and Gertrude have been gravitating toward a reduced pension payout for Marvin so that 50 percent of his monthly benefit continues to pay out to Gertrude when he dies.
With no survivor benefit, Marvin would receive $3,000 a month for the rest of his life, but if he chooses the 50 percent survivor benefit, his monthly payout would be $2,200.
But what if …?
Gertrude has a propensity to engage in lively bridge games with her adventuresome peers at the senior center, though the game has become a bit hairy of late. Rumors have been circulating about weapon-wielding players who are threatening not only the sanctity of the game but also the lives of other players. Sadly, after a few Irish coffees and a little too much gloating over a night of lucrative victories … well, let’s just say that Gertrude has met an unfortunate end.
If Marv had chosen the 50 percent survivor benefit and Gertrude predeceases him, he does not have the option to cancel the 50 percent survivor annuity and retrieve his full $3,000 monthly pension. In this case, he has no choice but to suffer a pension reduced by $800 a month for the rest of his life.
Marv could have chosen to apply for a life insurance policy with a death benefit sufficient to replace Gertrude’s 50 percent survivor benefit for the rest of her actuarially determined lifespan. This option, if he is insurable for a reasonable premium, affords him the freedom to choose the 100 percent pension benefit while earmarking $800 a month to cover the premium on the life insurance policy.
The rationale behind this technique lies in the freedom of choice Marv has given himself by taking control of his pension options.
Beneficiaries can be changed on pension survivor benefits only in the event of the survivor’s death, a divorce or through marriage. If Gertrude crosses a gang of unsavory, bridge-crazed characters and doesn’t live to tell about it, Marv can cancel his life insurance policy and stop paying the $800 monthly premium, thus resetting his monthly benefit to the full amount again.
Start early and revisit
This is just one technique out of many that can be used to add value to one’s retirement income planning, and it certainly does not address every relevant aspect of the strategy. Nor have we reviewed the pitfalls to avoid in attempting to implement this strategy.
Always seek the help of a certified financial planner well in advance of any decision and be sure to consider all of your options. Whatever decision you make will stay with you for the rest of your life, so make it an informed one.
Anthony M. Conte is managing partner at Conte Wealth Advisors, with offices in Camp Hill and Fort Myers, Fla. He has a master’s degree in financial services and the Certified Financial Planner certification. Email him at firstname.lastname@example.org.
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