Part II: Selecting the Wrong Pension Option

Wednesday, August 19th, 2015

After being prompted by Lucent’s recent offer to several Relaxing Retirement members to change their existing pensions into a lump sum payout, we explored the challenging decision when you’re offered a choice between receiving your pension as a monthly check vs. receiving it in a lump sum last week.

In some cases, however, you’re not afforded this choice, and you’re forced to receive your pension in the form of a monthly check. (Teachers, administrators, firefighters, and police officers in Massachusetts are an example of this)

Although the decision to receive your pension on a monthly basis is made for you, you now face another round of options. In many cases, you’ll have over 10 options to choose from if you’re married!

And, as I alluded to last week, if the prospect of having to choose from so many options wasn’t bad enough, once you finally make a selection and submit your paperwork, you can’t go back and change it!

Irrevocable Decision You Can’t Change

This is an irrevocable decision that will be with you for the rest of your life! In 2 years, if you decide that you would have been better off choosing a different option, you can’t go back and change it.

That’s why it’s so surprising to me to learn that the average length of time a typical American spends analyzing all of their pension options prior to making a selection, is less than 15 minutes!

Imagine that! A decision that will affect them for the rest of their lives that they can’t go back and change, and they don’t take the time to analyze the pros and cons of each option

Take the Time to Understand Your Options

If you don’t have the lump sum option pension option available to you, chances are great that you will have a choice of receiving:

  • Single Life: a pension that will be paid to you each month for the rest of your life. However, when you pass away, the check does NOT continue to your spouse. Or,
  • Joint and Survivor: a monthly pension that is much smaller while you’re alive, but a portion of it will continue to your spouse as long as your spouse lives. (there are many different options including 100%, 50%, 66 2/3%, 10 Year Certain, etc.)

Too many individuals give this no thought at all and just assume that one of the joint and survivor options is the only way to go if they’re married.

The reason this is such a costly mistake is if you closely examine the amount you’re going to receive, you’ll notice that the amount you’ll receive under any of the Joint and Survivor options is substantially less than under the Single Life option.

This is the “cost” they are charging you to make sure that your pension continues to your spouse.

In a recent situation with a Relaxing Retirement member, that “cost’ to protect his spouse is over $15,000 per year! That’s over $150,000 over the next 10 years, and over $300,000 over the next 20 years!

Is there a better way to protect your spouse?

Possibly!

To begin with, you have to realize that your employer, and the pension firm they use, is charging you a substantial amount of money to make sure that your spouse receives your pension when you pass away.

In short, they’re using that money to purchase life insurance on you along with all of their other employees. The difference between what you would have received if you chose the single life option and the amount you will receive utilizing a joint a survivor option is the premium they’re charging you. In the situation I mentioned above, that amount is $15,000 per year.

Can You Do Better?

The question you have to ask yourself that virtually nobody does is, “can you do better on your own?”

If you could go out and purchase a life insurance policy that would potentially provide the same monthly pension amount to your spouse when you pass away, and the cost of that policy was less than $15,000 to provide the same benefits as your pension, do you think it would be worth it to explore that option?

Well, in the situation I mentioned above, this individual is able to purchase a life insurance policy providing the same joint and survivor benefits as his pension, but for only $10,000 per year.

That’s a savings to him and his wife of over $5,000 per year, or $100,000 over the next 20 years! Pretty substantial, wouldn’t you say?

That $5,000 can mean another vacation for him and his wife every year!

Does It Work For Everyone?

I must tell you that this Strategy doesn’t work for everyone. In fact, it works about 50% of the time because you have to medically qualify for the private policy.

However, wouldn’t it make sense to explore this option and see if you can save money?

It could mean another vacation for you each year too!

Committed To Your Relaxing Retirement,



Jack Phelps

The Retirement Coach

P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.

I appreciate the trust you place in me. Thank you! (The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)