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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. This is the option most people take
For example, let's assume the single-life pension payout for a 60-year old is $8,000 per month and the joint-life pension payout for you and your spouse (age 59) is $7,000 per month.
Under this scenario, you are taking $1,000 a month less for the rest of your life!! To insure that your spouse gets a monthly income for their life HOWEVER that is $12,000 a year, $120,000 over 10 years, $240,000 over 20 years and a staggering $360,000 over 30 years ..... that is YOUR money...... What happens if your wife passes on first? or you both live a long time ( under life expectancy you both should) and 25 years from now you pass on, when your wife passes on, the kids get nothing!!!
Another problem is what if your wife needs/ or wants more money to help support your children or the future grandchildren?, Under your current plan the pension plan will only allow her a monthly check, no option for a large cash lump sum and all income is taxable.
Under the pension maximization strategy, you would select the single-life of $8,000 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, Your husband buys a permanent life insurance policy on himself for the largest death benefit that a $12,000 annual premium will buy with the spouse as the beneficiary. When your husband passes on, under this strategy, 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 your husband 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.
Using a pension maximization strategy, you pick the option that pays the maximum pension, while you take out life insurance to provide for your spouse upon your death.
But with adequate life insurance, a pension maximization strategy can put more money in your pocket immediately after your retire—and hopefully for years to come.
Other benefits of a pension maximization strategy include:
As a Certified Financial Planner, I can help you and your family with this strategy but still have many questions before we can consider this option such as:
Pension maximization is a financial strategy that has the potential to increase retirement income by combining the benefits of permanent life insurance with aspects of a defined benefit pension plan, particularly in cases where the pension