Pension maximization refers to a specific pension planning technique that can be used by couples to weigh possible pension payment options. You can also consider these options as annuity options, as they are similar to what you find in a single premium instant annuity, like the ones I referred to in this article on and created your own pension . <! – ->
So you've been enslaved for the last 30 years on your post and now that day is visible. What day is it?
Retirees are often faced with a difficult decision when searching through the payment options for their pension, and unfortunately they are forced to make choices without having complete information. <! – ->  If you have worked at a place that has a pension plan or a defined benefit pension plan (probably a government position) you will be forced to make a very tough and irrevocable choice.
Irrevocable Choice for Your Future Retirement Income
That's right, you have to make a choice regarding your pension controls that can never be changed when they are chosen.
You will have to choose between the two most common payout options: <! – ->
- Life Only – A higher payout that ends when you die. This means that you get as much money as possible every month, but if you are married, your spouse gets nothing when you die.
- Survival – a lower payment that gives your spouse some income when you are away. This option varies depending on your specific plan.
Life-only is pretty self-explanatory. If you die the week after your pension check begins to roll in, your spouse is "up the creek" and has lost the income stream and cash value of your pension.
If you choose the compliance option, you will receive a reduced amount of money while both you and your spouse live, but it guarantees an income for your spouse in the event that you die first.
In our practice, our clients who face tough decisions regarding survival options when it comes to their pensions are usually retired municipal employees, government employees or federal government employees.
To further complicate the lack of good information available to them, many people have been misled about their survival options and are more likely to make a bad decision.
A major problem is that most people have no idea how long they will live after they retire and they do not know how long their spouse will live in retirement. It seems even more impossible for humans to make an educated guess at either themselves.
Think of the financial risk that someone chooses an alternative for survival instead of the lifelong alternative.
If they survive their spouses, the pensioner has now forgotten a significant part of their potential income stream. In many cases, they are paid half as much as if they had chosen the lifelong alternative.
How does pension maximization solve the problem?
Our solution to your dilemma: a strategy that has existed forever but is not really discussed that often – pension maximization. <! – ->
It is not a difficult concept to understand and will make perfect sense after looking at an example. Take a look at the numbers below if you are a visual type of person and the various options will be cleared for you.
It's really about comparing the numbers. There is no good way to project or assume numbers when considering whether this is a profitable option for you, the best or should I say, the only way is to know exactly how much your pension will pay you for the various payout options  When you look at the difference between the "life only" option and the survival options, you can see the difference in the payout and these are the numbers you need to use to solve the problem.
For example, suppose Bob Jones is 59 and he plans to retire next year when he is 60. <! – ->
If he chooses the lifelong option from his pension, he will receive $ 2000 / month. On the other hand, if he chooses the survival option, he will receive $ 1600 / month and his wife will receive $ 800 / month if he dies before her. This is a very typical "life with 50% survival" option.
If now Jones is something that most people today, $ 2000 / month is barely enough. So why would we think Mrs. Jones could make $ 800 / month when he's gone anyway? The math just doesn't work.
Retirement maximization is coming in to save the day!
We would evaluate Mr. Jones' situation fully to understand his options and other sources of income. Then we would determine the difference between his two options. <! – ->
In this case, there is a difference of $ 400 / month between life only and the surviving alternative.
Provided that Mr. Jones is healthy and can get a decent offer from a life insurance company, he has $ 400 / month to use to buy insurance that more than replaces the income Mrs. Jones would have gotten if he had chosen the option of survival
It is actually six out of one, half a dozen of another.
We find that people can understand this concept, it is not difficult to wrap your head around.
But they often feel that there is no way they can afford to pay $ 400 / month for life insurance, especially after they retire.
First, we are not saying that they should … necessarily. Each case is different.
But we only make the argument that you could mathematically.
Think of it this way:
Let's say you opened a new muffin bakery. These places are all the rage down in the woods. You are tickled pink to bake delicious culinary delights and do not even care about your working day which now begins at 04.00. The store is full of clothing customers all day, you have more orders than you can handle and you have been able to raise your prices consistently without customer complaints.
You only have one, small problem.
To offer your customers the convenience of paying by credit card / debit card, you must pay 3.5% of your gross card receipts to the trading company.
As any good business person will do, send your costs to your customer. But as a courtesy, you decide to send out a sign on the front and let your customers know about the change.
Your sign guy has come up with two options for your sign and they are:
- It will be added 3.5% to the amount for customers who pay by credit / debit card
- All customers who pay in cash get 3, 5% discount
Do not both say the same thing?
Of course they do.
But as a store owner, you should definitely choose option 2.
Because the psychology of a rebate is always preferable to the pain of a fee
Most people believe that by choosing a survivor option on their pension payout, they are only reducing their payout. What I'm saying is that you actually have a cost.
If your monthly pension is $ 2000 / month, what difference does it make if you choose to have $ 1600 / month directly into your account instead of depositing the entire $ 2000 / month and then write a check for $ 400 / month to pay a life insurance premium?
The net result is exactly the same.
But the psychology of seeing a reducing bank balance can not be discounted. We all know that life insurance is a cost. But is it not the same cost as choosing the survival option?
To make a rational decision, you have to look at choosing a survivor option as a cost … because that's what it is.
An Example of How Pension Maximization Works
Let's assume that Mr. Jones has decided to buy a life insurance policy to maximize his pension payment. Remember that the difference in his case is $ 400 / month.
So, provided he will have to pay the state and Uncle Sam some taxes on the $ 400, we will look at having $ 300 / month available for life insurance premiums. When we look at the companies we have available, it looks like he could buy a permanent life insurance (whole life or guaranteed a universal life) with more than enough death benefits – about $ 250,000 for Mrs. Jones for to generate a replacement
In order for all things to be equal, we must also keep in mind that the income from life insurance is tax-free.
So that $ 250,000 is the taxable equivalent of $ 312,500 (of us assumed a total of 25% tax level). This gives corresponds to a present value of $ 167,720 in today's dollars if we used an inflation rate of 3% for 21 years, which is Mr. Jones life expectancy at age 60 according to the table of life expectancy over ssa.gov [19459004
So what's the point?
Mr. Jones simply reduces his monthly payout by $ 400 when he chooses the survival option, but he actually accepts an increasing cost.
Keep in mind that every year he will probably receive a COLA with his pension benefit. Let us assume for the sake of argument that he gets a COLA increase of 3% every year.
During Jones' first full-year retirement, he sacrificed $ 4,800 in income by choosing the survival option for his payout.
But if his payout increases every year, what does he really give up?
Let's take a look at a diagram that helps illustrate the point. ] Pension maximization "width =" 173 "height =" 426 "/>
Contrast the rising cost of choosing the survivor option with the level of the cost of life insurance premiums.
The longer Mr. Jones lives, the more appealing will be the fixed cost of life insurance.
Are you looking at pension maximization?
Using a pension maximization strategy involves a deeper discussion and some very specific calculations that will depend on your situation. in these scenarios I have never seen two that were exactly the same, but in any case there was a clear winner, at least based on mathematics.
Using a life insurance policy can definitely help you maximize your own retirement income from retirement, but you should get the insurance as soon as possible.We have had a lot of cases over the years where someone was waiting and the cost was too high due to age and health.
Everyone's f all are different and you really need to consider all your options, contact us for more help.