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A Way to Potentially Maximize Your Pension Payments

If you’ve got a traditional pension plan from work, you’re one of only about 31% of Americans. Having a form of guaranteed income in retirement is always a nice benefit.

One thing you should know about pensions, though, is that if you’re married, your pension benefits are required to be paid out to you and your spouse in the form of what’s called a “qualified joint and survivor annuity,” or QJSA for short. What this means is that unless your spouse elects to waive that form of payment in favor of something else, you’re going to receive a reduced amount of your benefit during your lifetime, so that your spouse will get at least 50% of that amount if you happen to die first.

On the other hand, if you both elect instead to receive, say, a single-life annuity, the monthly benefit to you while you’re alive will probably be significantly larger, but the payments would stop at your death, and thus your surviving spouse would get nothing. What we often see is that pension plan participants who want to maximize their monthly retirement income are often tempted to choose the single-life annuity because it gives them the higher payments.

The problem is that this can create the problem of providing an income for their spouses if the pension owner happens to die first. And that too is often a big concern.

So what can we do about this? One strategy that may work for you is something called “Pension Maximization.” And it attempts to do just what the name implies.

Pension Maximization

Here’s how it works. Take a husband and wife as an example, where the husband is the one with the pension. The husband elects, with his wife’s consent, to waive the lower QJSA payment and receive his pension benefit instead as a single-life annuity — which is a larger amount, but will last only as long as he is alive.

That additional pension income is then used to purchase life insurance on the husband, with the wife named as beneficiary. If the husband dies first, the pension payments will stop, but his spouse will receive the life insurance death proceeds, tax free, which she can use to meet her income needs.

So by coupling the larger pension payments with the purchase of a life insurance policy on the husband’s life, both spouses in this example may be able to increase their total income during retirement, while also providing for the wife’s financial future if the husband dies first.  If the wife passes away first, the husband can discontinue the life insurance and keep the higher income from his “life-only” pension. Or, maybe the wife doesn’t live much longer than the husband; in that case, the remaining death benefit would go to their heirs.

Keep in mind that there are a number of potential roadblocks to consider in this example, like: is the husband even insurable, or is he likely to outlive his spouse? If not, then pension maximization may not be a good strategy.  And even if he is “likely” to outlive her, they may still want to get some insurance – just in case.

Life Insurance Costs

Also, how much will the life insurance cost?  Will it cost as much (or more) than the difference between the single life and joint life payments?  Remember, the cut in benefits you’ll get with the lower joint-and-survivor option is kind of like paying an insurance premium to allow the surviving spouse to continue to receive your pension benefits.  The larger the benefits under the single-life annuity, the greater the income that will be required to pay the premiums for the life insurance policy.

Putting it all together

So there’s lots to think about here.  The pension maximization technique is not for everyone, but it’s something you may want to consider as you evaluate your pension benefit options.  And it’s a good idea to start planning for it BEFORE you get to retirement age.

Is this technique potentially suitable for you? We do these evaluations every single day at Lucia Capital Group, so just give us a call, and we’ll review your situation. How can we help you the most? Just let us know. As always, we’re here to help.

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal.

Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

Insurance services offered through LPL Financial or its licensed affiliates. CA Insurance Lic. #0518721.

Annuities are long-term investment products designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer subject to their terms and conditions. Early withdrawals may be subject to surrender penalties and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Annuities are not FDIC insured. Certain terms and conditions apply, so please read insurance company materials carefully.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial. LPL

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