With most contemporary companies opting for employer-sponsored, defined-contribution plans, like 401(k)s, pensions, that is, defined-benefit retirement plans, are less and less common these days.

Because of their popularity, these days, a lot of retirement-planning materials are focused upon 401(k)s — and other, similar vehicles (like 403(b)s and 457(b)s) — as well as upon privately obtained vehicles such as Traditional Individual Retirement Accounts (IRAs) and Roth IRAs.

This is well and good for people whose retirements are centered around these plans. But it is not so good for those who still have pensions.

People who still have pensions from Boeing, for example, from the Public School Retirement System of Missouri (PSRS), or from the Public Education Employee Retirement System of Missouri (PEERS) still need quality advice. And it is in short supply.

Unfortunately, for too many St. Louisans, the good fortune of having access to a pension is coupled with the not-so-good fortune of having fewer resources with which to learn about their options.

Once You Elect a Pension Option, You’re Stuck With It

Consider a few things.

How long and how hard did you work to secure your pension benefits?

I’m guessing that, for many readers, this answer will be some variant on: I worked long and hard!

How long do you plan to be retired? A few years? Or, for the rest of your life?

Although it may seem like it, I’m not being facetious.

The point is that once you elect a pension benefit you cannot go back and change your election. Once the determination is made, it’s set in stone.

Wouldn’t it make sense to ensure — to the best of your ability — that the option you elect is going to be the best one for your family?

For most soon-to-be pensioners, the answer is: Obviously, yes!

Have You Heard the Phrase ‘Pension Maximization’?

If you answered “yes,” then would it surprise you to learn that one very important option probably will not even be presented to you in your benefit-election materials?

For many people, the options they see will be something like the following. To illustrate a few common options, let’s consider a hypothetical situation in which a prospective retiree, call her “Jane,” is eligible to receive as much as $4,500/month. (These numbers are simply being made up for purposes of this mental exercise!)

There may be any of a number of options actually presented. To simplify things, I’ll just consider three possibilities.

The first option presented to Jane will be something like this. If she elects to receive pension benefits just for herself, with no provision for her husband (call him “John”) in the event that she predeceases him, then she will receive the full $4,500 every month.

To be clear, on this option, Jane and John will receive Jane’s $4,500 every month so long as she lives. But if Jane dies first, John gets $0.

She’ll also have several “survivorship options” presented to her.

For example, her election form may indicate that if she wants to guarantee her husband 100% of her benefit in the event of her death, then she will take a $1,000 pay cut. So, for example, she can elect to receive $3,500/month instead of $4,500.

Why would she choose this?

Well, if Jane chooses this option, then Jane and John will receive her $3,500 every month for as long as she lives. But, in the event of her death, John will continue to receive $3,500 for the rest of his life. Jane’s pension cut pays for John’s possible, future benefit.

A third possibility — among many that we’re ignoring — is that Jane may choose some middle-of-the-road option.

Let’s say that if Jane takes a $500 pension reduction, then she can guarantee John 50% of her benefit in the event that she dies first.

So, on this picture, Jane and John will get Jane’s $4,000 each month in their mailbox. But if Jane dies first, then John will continue to receive $2,000 until his death.

For many people, making absolutely no provision for a surviving spouse is virtually unthinkable. And, in Missouri, the spouse’s acknowledgement of this — and permission — would need to be secured in writing before it was enacted.

This means that Jane will be compelled to leave between $500 and $1,000 on the table, as it were, every month in order to provide some survivorship benefit to John.

But, what is it called when you pay a sum of money every month in order to provide a monetary benefit for a beneficiary in the event of your death.

Isn’t that called “life insurance”?

Arguably, Jane would be paying between $500 and $1,000 every month in order to make sure that John has money in the event of her death. You can consider this reduction in Jane’s pension benefit to be tantamount to a life-insurance premium.

Wouldn’t You Like to Shop Around to See If You Could Get a Better Deal?

At its most basic level, a “pension maximization” — or “pension max” — works like this. (I’m going to give a very rough-and-ready sketch!)

Firstly, you consider electing the highest pension-payout option.

In Jane’s case, it would be $4,500/month.

Secondly, you find out how much it would take to recreate the desired survivorship for your spouse through a privately obtained life-insurance policy.

For example, let’s say that Jane could purchase an $840,000 life-insurance policy for $800/month.

Recall that if Jane elected $3,500/month as a pension, then John would continue to receive $3,500 per month in the event of her death. But, here’s the alternative.

If Jane buys an $840,000 life-insurance policy, forgetting about investment returns, she can reproduce a $3,500-per-month benefit for John for 20 years, in the event of her death. And she secures this benefit for $800/month, which means that she actually gets $3,700/month of her pension money. ($4,500 minus the $800 life-insurance premium.)

Suppose, instead, that she desires to preserve a smaller benefit amount. (Maybe they also have 401(k) money somewhere.)

Let’s say that Jane can pay $400/month for a $480,000 life-insurance policy. So, here, she can guarantee $2,000/month for John for 20 years if she were to pass. And, on this option, she’d bring in $4,100/month herself — instead of the $4,000/month specified by the relevant pension-election option.

Will This Work for you?

This sort of strategy can be very attractive.

For one thing, if John predeceases Jane, the life policy can be terminated, or could have alternate beneficiaries designated — such as kids or grand kids. That cannot be accomplished with a pension form.

It also may provide Jane and John with more money in their pockets in the meantime.

But… the strategy is dependent on several things, including the health and underwriting classification of the prospective pensioner.

If you think you even might be interested in finding out whether this sort of strategy would work for you, call for a no-cost, no-obligation review, today!

(636)447-1169