Thousands of publications and websites, and millions of words on the importance
of pre-retirement income planning. And yet, many will spend more time planning
a summer vacation than the decades they will spend in retirement. Is there
room, or need, for yet another page or two? At Retirement Income Solutions,LLC, we
think so!
Why?
Because the need is so great, and we have few chances to "get it right".
Missteps along the way are expensive, and time to correct them may be short.
Fortunately, there is much good information available to help us on such subjects as risk management,
equities and fixed instruments, asset allocation, tax treatment, etc.
However, one area that we believe receives scant informed discussion
has to do with choosing a pension option within a "defined benefit" penson plan,
and choosing a survivor benefit.
Specifically, a concept known as Pension Maximization ("PenMax", for short
) may be very important on several levels.
The major benefits of PenMax include:
- Having a system to make a rational and informed decision
-
Enabling a qualified retiree to safely choose the highest pension income
- Converting the cost of a survivor benefit into increasing equity you own
- Multiple uses of the same dollar
- The possibility of leaving a large sum to heirs and beneficiaries instead of forfeiting it.
Millions of employees have a defined benefit (DB) pension plan. Typical
among them are government employees, educators, circuit judges, union members,
police and fire fighters, etc. DB plans usually base the retirement benefit on
the number of years of credited service, final average salary, (sometimes) age,
and which Pension Option is chosen.
There often are six options or more from which to choose. But you usually must
dig hard to find the one which often provides the greatest array of benefits--
Pension Maximization. PenMax is not an "Option" in the literal sense, but an
approach to deciding which Option to elect, and to underwrite the Survivor Benefit
cost directly, rather than indirectly through some reduced benefit for a spouse.
What eventually happens to many results in a double loss--human and financial.
The typical DB pension plan works like this:
If the retiree dies first, the survivor receives the stipulated benefit for
his/her remaining time. Or the would-be survivor dies first (even after 20 years) and
the retiree continues to receive his benefit for his remaining years.
But the retiree has incurred the cost for all those years, with no possibility
of a "refund". The cost has been for naught. And if neither the retiree
nor the survivor lives to or through life expectancy, then the entire amount of
the underlying funding of the benefit reverts to the retirement plan. It does not
go to a beneficiary of the retiree's choosing.
The amount still "in the pot" (actuarially budgeted) easily can be $500,000 to
$1,000,000, and sometimes much more!
Joint and Survivor pension benefits have a cost:
SINGLE LIFE OPTION minus JOINT & SURVIVOR OPTION equals COST
COST = FORFEITURE
This is an ongoing cost, one which is paid with each retirement check. It
increases with each COLA. The cumulative cost (of these annual $3,000
to $15,000 pension reductions) is likely to be great over two or three
or more decades of retirement.
The question becomes whether there is a way to convert these costs into equity
(an asset the retiree owns) or into some form of asset perpetuation, rather than
merely being paid as a cost of assuring survivor income in case something happens to the retiring person.
Now, contrast this with Pension Maximization; PenMax is a way to self-insure
against the risk, building equity, and to guarantee the perpetuation of retirement
income to survivors beyond the lifetime of the retiree. Properly done, it is
designed to parallel the income payments of the retirement system, and reduce or
eliminate a number of unknowns associated with normal retirement planning
(Pension Options).
Is It New?
No. Pension Maximization is a resource-maximizing strategy that has
been utilized by many leading employee benefit consultants among
upper-income executives for decades. Many Fortune 500 companies recognize the
potential financial advantages to their employees, and provide analysis as a
valuable employee benefit to their executives. Unfortunately, a number of
factors have limited the migration of this technique to more typical (and just
as important) salary levels and retirement decisions.
Cautions!
Any significant financial decision calls for caution, good fact-finding,
careful analysis, and understanding what one is doing. Among the factors that
must be satisfactorily addressed are:
- That the amount of replacement income is large enough to
assure similar/satisfactory income (including COLA increases) to the survivor;
- That very conservative interest assumptions are utilized throughout any illustrated income stream to a survivor;
- That only highly-rated and financially strong companies are
used.
How To Decide?
Carefully. Whether Pension Maximization is a good choice or not is determined by a thoughtful look at the issues--all of them. These issues include asking the right questions, putting accurate numbers to the costs and benefits of any decision, the personal health of the retiree and survivor, and their personal values and desires.
For a thorough discussion of various plans--Civil Service (CSRS), Federal Employees Retirement System (FERS), and various states' plans, click on MaxPensions.com.
The issues themselves are not beyond the understanding of most people. However,
the analysis of the issues can be very complex. Hence, expertise is necessary.
Could these ideas benefit you? Help is only a mouse click away!
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