Pension Maximization Strategies

Quick Answer: Pension maximization is a strategy that lets you take the higher single-life payout from your pension and use a life insurance policy to protect your spouse financially after your death. Whether it's right for you depends on both spouses' health, the gap between your payout options, and your other retirement income sources.

If you are among the rare few with a retirement pension, congratulations! You have a benefit that is becoming increasingly rare.

With the 401(k) plan becoming the workplace retirement plan of choice, people hold more responsibility for their financial futures than ever.

Knowing you have a pension gives you the comfort of knowing that, once you retire, you are scheduled to receive monthly income payouts for life. Your income payment will be based on your salary and your length of employment.

Just like with annuity payout options, the lifetime payout option you select with your pension plan will have a direct bearing on how much income you receive.

Survivor's Benefit: Single Life or Joint and Survivor?

Let's say your retirement day has dawned and you are going to meet with your pension plan administrator. You will be asked a very important question.

Which distribution option do you choose: "single life" or "joint and survivor" distribution?

Single life refers to the option that pays you pension benefits until you pass away, therefore paying during your life alone. The joint and survivor distribution pays your monthly pension to you while you are alive, then pays that benefit to your spouse until their passing.

If the joint and survivor option seems the obvious choice to ensure your spouse is taken care of, there are other factors to consider.

Selecting the joint and survivor option means that you will receive a lower pension payout from the beginning. Why?

Because the payment is calculated on the assumption that payouts will continue for a longer period. The payouts would cover not only your lifespan, but that of your spouse as well.

How Your Pension Payout Options Differ in Practice

So, how might this affect you in real-world dollars and cents? Let's look at a scenario involving two couples.

Joan and Arthur are a married couple. She is 60, he is 70. Arthur has a pension at work. He decides on a single life distribution for their monthly payments. A sum of $650,000 will be divvied up for their income payments, with their payouts starting in year 1.

Based on a single life distribution choice, they will receive $35,475 a year from his pension. Now, say that Arthur chose a joint and survivor distribution instead. While Joan would continue receiving lifetime income when he passed away, the monthly payouts will be smaller.

With a joint and survivor distribution, Joan and Arthur would be paid $26,125 — almost a $10,000 step down from the single life distribution.

Why Age Gaps Matter in Pension Payouts

This brings up another important point. Couples' age differences also play a role in the sum of income payouts.

The wider an age gap both spouses have, the bigger the difference will be in payouts from single life and joint and survivor distributions. And when couples are closer in age, the smaller the difference will be in payouts.

Here's another example for illustration. Another couple, Peter and Sandra, are both 70 years old. Sandra has a pension at work. And the nest-egg sum to be divvied up is again $650,000, with income payments starting in year 1.

Just as before, assume that a single life distribution from Sandra's pension would pay out $34,475 a year. But now with Peter and Sandra being the same age, the gap between payouts shrinks. A joint and survivor distribution would bring $32,038.

The Pension Maximization Strategy Explained

Knowing that the highest pension payout comes from choosing single life, an innovative income strategy has emerged: the pension maximization strategy.

Pension maximization is designed to provide pensioners with the highest payout and then provide income for their spouse upon their passing.

With pension maximization, a retiree chooses the higher payout of single life and then purchases a life insurance policy with a considerable death benefit for their spouse.

Their partner will receive the death benefit proceeds should the pension holder die first.

From there, the surviving spouse has the option to purchase an immediate annuity that can function as lifelong income, just as the joint and survivor option would have.

Is Pension Maximization Right for You?

Your circumstances are unique. They should be carefully considered before deciding your pension payout strategy. Consulting with a financial professional can help you explore your options and determine which strategy might be best for you.

Some questions for you, your spouse, and your financial professional to consider:

• What is the difference in payouts between your two options?
• How healthy are you and your spouse?
• How healthy is your pension plan?
• What other assets will you rely on for income streams?
• What are both of your Social Security claiming strategies?
• What are you and your spouse's ages?
• When do you both plan to retire and start drawing retirement income?
• Should your spouse predecease you, would you want your children to become beneficiaries?

The first and second questions are intertwined. If you are in good health, you will have more time to collect the larger monthly income that is derived from single life.

If your health is questionable, having less time to draw the higher amount may make securing your spouse's guaranteed income with the joint and survivor option your top priority.

Your spouse's health becomes a factor in another way. Upon your passing, your pension can only be paid to your spouse, not to your children. If your spouse is likely to pass away before you do, taking the higher payout and having a life insurance policy with the flexibility to change beneficiaries (from your spouse to your children, for example) could address your legacy goals.

Other Important Factors in Your Decision

Your health isn't the only consideration. The health of your pension plan could be a weighty factor in deciding between your payout options. There have been many headlines over the last decades about companies closing and shutting down their pension plans.

Even some public-sector pensions have generated troubling headlines around their ability to keep up with their pension payouts.

There is some relief in knowing private pension plans are at least partially insured by a government agency, the Pension Benefit Guaranty Corporation (PBGC). It was established in 1974 by the Employee Retirement Income Security Act (ERISA).

The PBGC was created to step in should an employer's pension fund go bankrupt. While the PBGC makes payments to retirees, it doesn't pay the entire amount that the former employee is due.

The PBGC has reported protecting tens of millions of workers across thousands of private pension plans and paying billions annually to retirees in failed plans. These statistics show that pension plans can fail. Learning about the health of your own plan can influence your decision on which payout to select.

It should be noted that the PBGC guarantees only up to a maximum annual benefit — a figure that has changed over time and is subject to your age and plan type. Visit pbgc.gov for current guarantee limits. The PBGC does not guarantee it will pay the full benefits promised to a retiree by their employer.

Building Your Retirement Income Plan

If your retirement is within 10 years, now is a good time to explore your own situation, your pension plan options, and other parts of your retirement income puzzle.

That includes retirement income strategies that could help maximize not only your lifetime pension income, but also the retirement lifestyle you and your spouse enjoy.

If you need personal guidance, a financial professional can help you explore various pension maximization strategies and other income-generating options. Many financial professionals at SafeMoney.com stand ready to assist you.

Frequently Asked Questions

What is pension maximization?

Pension maximization is a retirement income strategy where a pensioner selects the single-life (higher) payout option instead of joint-and-survivor, then purchases a life insurance policy to provide for a surviving spouse. When the pensioner dies, the spouse receives the death benefit and may use it to purchase a guaranteed income product — such as an immediate annuity — to replace the lost pension income. The strategy works best when life insurance is affordable relative to the payout difference.

How does the joint and survivor option affect monthly pension payments?

The joint and survivor option reduces your monthly pension payment because the plan actuarially accounts for the possibility of paying income to two people over two lifetimes. The reduction depends on both spouses' ages and the specific terms of your plan. A couple with a large age gap — like a 70-year-old and a 60-year-old — will see a much steeper reduction than a couple who are the same age.

How does age difference affect the pension maximization decision?

The wider the age gap, the more the joint and survivor payout is reduced relative to single life. For a large age gap couple, the pension maximization strategy may produce significantly more monthly income. For same-age or near-same-age couples, the payout difference is narrower, which changes the math on whether the life insurance premiums make the strategy worthwhile.

What if my pension plan fails?

Private pension plans are partially insured by the federal Pension Benefit Guaranty Corporation (PBGC), established under ERISA in 1974. If your employer's plan fails, the PBGC steps in — but it only guarantees up to a capped maximum benefit, not necessarily the full amount your employer promised. Public-sector and some church-affiliated plans operate outside PBGC coverage entirely. Check pbgc.gov for current guarantee levels and your plan's status.

Who should consider a pension maximization strategy?

Pension maximization is most worth evaluating if: the payout difference between single-life and joint-and-survivor options is substantial, you are in good enough health to qualify for life insurance at reasonable rates, and you want the flexibility to direct your death benefit to beneficiaries beyond your spouse. A financial professional can model the break-even point — the age at which the joint-and-survivor option would have paid out more — so you can make an informed decision.

Ready to explore whether pension maximization fits your retirement income plan? Connect with a retirement income specialist at SafeMoney.com — many independent professionals are available at no cost to discuss your specific situation.