Pension Maximization - The 5 Retirement Scenarios You Should Know

The vast majority of married retirees choose a "Survivor Option" from their pension plan when they retire. This means that if they should die first, pension income will continue on for their spouse. Retirees receive less pension income to pay for this future benefit.

Here are 5 retirement scenarios a retiree should consider before choosing a "Survivor Option" from their pension plan:

1. How much income will we have while we are both alive?
2. How much income will my spouse have if I die first?
3. How much income will I have if my spouse dies first?
4. What happens to my pension if we both die at or around the same time?
5. Will I have access to any money from the pension in case of an emergency or opportunity?

Pension maximization is a retirement planning strategy which may allow the retiree to select the maximum income "Single Life Option", instead of the reduced income "Survivor Option". With the additional income, the retiree purchases a life insurance policy on their life naming their beneficiary as the recipient of the money. The policy is designed to replace the survivor benefit. A pension maximization strategy may help achieve an advantage over the "Survivor Option" in all 5 scenarios.

Here are some of the possible advantages of pension maximization in each scenario:

In scenario 1, the couple can have more income while they are both alive. If a cost of living adjustment (COLA) exists for the retiree, they can receive more COLA income each year from selecting the higher income "Single Life Option".

In scenario 2, All income from the pension plan's "Survivor Option" is taxable. Using a pension maximization strategy, the spouse receives a tax free lump sum life insurance death benefit. They can select an optional tax favored installment payment if they choose (only pay income tax on the interest earned).

In scenario 3, the retiree will stay at the highest income level possible. The retiree can surrender the policy and receive any cash accumulated tax free or favored, or continue the policy and change the beneficiary at will. On the other hand, depending on the pension plan, the "Survivor Option" may keep the retiree at the reduced income level for their lifetime. Any change in beneficiary, will cause a recalculation in pension income. If the retiree remarries someone younger than their deceased spouse or names one of their children as the beneficiary, the retiree will receive less pension income than they previously received.

In scenario 4, the life insurance death benefit can be passed on to their children, estate or favorite charity. Alternatively, with a "Survivor Option", all pension payments cease after the 2nd death.

In scenario 5, the retiree can access money accumulated in the life insurance policy. It, however, will reduce the insurance policy's death benefit. The pension plan's "Survivor Option" has no cash fund available to the retiree.

Many factors such as insurability, availability of health insurance for the spouse and after tax income effects need to be evaluated before selecting a pension maximization retirement planning strategy.
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