What is pension maximization?


Pension maximization refers to a strategy for choosing a payout option at the time of your retirement. Employees near retirement age may be faced with a rather difficult decision when presented with the retirement plan payout options. Most pension plans will offer the participant at least two common payout options: single-life payout or joint-life payout. Under the single-life payout, your pension check will be higher - but it stops at the time of your death. Under the joint-life payout option, the pension check will be smaller - but it continues to pay even after your death, to your spouse. So, if your spouse outlives you, he/she will continue to receive your pension check until their death.

taxedfingerCanFor example, let's assume the single-life pension payout for a 65-year old is $5,000 per month and the joint-life pension payout for you and your spouse (age 62) is $4,000 per month.

Under the pension maximization strategy, the employee would select the single-life $5,000 per month payout, which is $1,000 more per month (or $12,000 per year), rather than the joint-life payout. However, instead of spending this extra $12,000, the employee buys a permanent life insurance policy on himself/herself for the largest death benefit that a $12,000 annual premium will buy with the spouse as the beneficiary. When the employee dies, the pension payout stops; however, the spouse then receives a large death benefit payout (tax-free) which can be invested and uses to replace the taxable pension payout that is no longer available.

It is very important that the employee first applies and qualifies for the appropriate amount of life insurance prior to making their pension selection. The pension selection is usually irreversible, so you'll want to make sure that you are insurable and offered a reasonable life insurance policy prior to committing to the higher single-life pension payout amount.

Contact us if you are in a defined benefit pension nearing retirement to get a handle on your options.~



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