Pension Maximization: The Only Guide You’ll Ever Need

The Only Guide You'll Ever Need for Pension Maximization

Quick Article Guide

  1. How A Pension Works
  2. How to Maximize
  3. The Benefits
  4. Two Key Factors
  5. Create a Strategy

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If you’re fortunate enough to work for an employer who still offers a pension plan for your retirement, the longtime comfort you’ve been taking in simply knowing you have a pension will eventually give way to a potentially nerve-racking one-time decision.

Do you take the lump sum or the monthly payment? The full pension or the spousal benefit? These are the two burning questions you’ll be faced with

Meanwhile, many people don’t realize that there’s actually another option on the table to get the most out of your retirement package: life insurance. Read on to learn more.

How a Pension Works

A pension is a defined-benefit retirement account in which an employer contributes a fixed payout during an employee’s retirement. Upon retiring, the employee typically has three main options:

  • Accept the full pension over their entire lifetime with no spousal benefit, meaning when they die, any money left in the account is absorbed.
  • Take a reduced payout to add a spousal benefit, so when they die, their spouse will receive the pension income.
  • Take a further reduced payout in exchange for a single lump sum.

Pension + Life Insurance = Pension Maximization

Using a strategy called pension maximization, you can supplement your pension with life insurance to accept the full payout while still providing financial protection for your spouse and family.   For example, if your full pension pays $4,500 per month, taking the spousal benefit might drop your payout to $3,700 per month.

Life insurance, on the other hand, can provide the same peace of mind and perhaps even a larger death benefit for, say, $200 per month. So, by accepting your full $4,500 per month pension and buying life insurance separately, you are putting $600 more in your pocket each month ($7,200 per year) compared to the spousal benefit.

The Benefits of Pension Maximization

Retirees and their spouses alike tend to prefer pension maximization over the spousal benefit in a pension. The benefits of pairing life insurance with your full pension are numerous:

  • A life insurance benefit is 100% tax-free, while pension income is subject to income tax. (Remember this when comparing the two. For example, if you have a $100,000 pension spousal benefit and a $100,000 life insurance death benefit side by side, the pension payout becomes more like $70,000 after taxes, while the life insurance payout holds at $100,000.)
  • A life insurance death benefit is paid as a lump sum. The only way to get a lump sum with a pension is to accept a greatly reduced payout.
  • Money from life insurance is generational. A pension with a spousal benefit is void after the spouse dies.
  • You have more leniency to adjust or cancel your life insurance coverage if your needs change. There is no going back on your pension decision.

Two Key Factors

In order for pension maximization to make sense, there are two prerequisites to keep in mind:

Your Health As is the case with just about any life insurance policy of value, your overall health is the single most important determining factor in your premium. Unfortunately, being in poor health or having a chronic illness can severely limit your ability to find affordable life insurance, which in turns negates the viability of pension maximization.

Time Finding and finalizing a life insurance policy takes time. If you’re considering life insurance in place of your spousal benefit, it’s imperative that you start shopping well in advance—we recommend six months to a year prior to your retirement date. If you wait until your employer’s deadline nears before searching for life insurance, you might be forced to accept the reduced payout in order to get guaranteed protection for your spouse.

Finding Someone to Orchestrate Your Strategy

If you are nearing retirement and think pension maximization might work for you, JRC Insurance can help evaluate, advise, and execute a life insurance strategy that enables you to take your full pension payout. As an independent agency, we’re able to shop 40+ carriers and find you the best coverage at the best rate. Click here to get your free life insurance quote today, or give us a call at 855-247-9555 and one of our agents will be able to show you your best options.

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Cliff Pendell

VP of Marketing at JRC Insurance Group
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.
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