When More Income is the Outcome

For many years, we have been living in the era of low interest rates. While this environment has consequences for all of us, retirees and their advisors are particularly feeling the impact. Projections and assumptions that many pre-retirees incorporated into their planning have been ratcheted down as rates declined and remained low. Many Americans are facing less retirement income than what is desirable or what they expected.

I recently had a conversation with a client whose pre-retirement choices are now, a few years into retirement, being felt. He retired with a defined benefit pension from his employer. Prior to retiring, we discussed pension maximization, a strategy he decided to forgo and now considers a missed opportunity.

From his hindsight comes a cautionary tale. It’s certainly worth weighing the benefit of pension maximization when choosing a direction for pension income. Should my client have opted for the “life only” choice, pension income would be based solely on his life. But in choosing the “joint and survivor” option, reduced income would continue to be paid to his spouse after his death. The latter also can reduce the income payout by 1/3 or 1/2. The pension maximization opportunity comes into play by choosing the larger “life only” income and using a portion of the payout to purchase a life insurance policy. This policy names the spouse beneficiary and the death benefit is used as a resource to replace the pension income lost at the client’s death.

Looking back, he sees this as a missed opportunity for more income – with low interest rates, income is hard to come by these days. Of course, receiving proceeds from a life insurance policy using that strategy at this time and replacing that lost pension income may be difficult as well.

But be advised: it’s important to note that in order to make this tradeoff worthwhile, this strategy works best with a relatively healthy person underwritten to keep policy costs down. Different planning opportunities exist when one or both spouses are impaired.  Also, the investment or income projections have to be realistic, both spouses have to understand and accept the technique, and the policy premiums must be paid on time so that the policy does not ever lapse.

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