A Little-Known Strategy for Maximizing Your Pension

This Pension Maximization Strategy is Worth Considering for a Possible Best Pension Payout with Highest Household Return, Over Time.

For those approaching retirement who have pension plans, you will soon be faced with what can be a daunting decision that is usually irreversible. If your pension plan is like most plans, you will be given a handful of pension election options that look like the following list:

Pension Election Options

On face value, the “Single Life Only 100% Benefit” is likely to pay the most on a monthly basis. However, for those who are married or have others for whom they’re responsible, this option fails to consider the risk of premature death, which would end the benefit. In this scenario, your choice is to hedge the risk of premature death by taking a reduced payout with survivor benefits.

What if there existed a better, more creative strategy that accomplished multiple goals? I will show you a way to claim Single Life Only 100% Benefit while at the same time protecting your family and loved ones. The strategy is called Pension Maximization.

Pension maximization allows you to claim the higher payout from the Single Life Only option and use a portion of the proceeds to obtain life insurance. Conceptually, you’re leveraging the Cash Flow generated from the higher pension payout to protect your family with life insurance in the event of an untimely death. If you pass away, the pension benefit ends, but your family receives life insurance proceeds.

So how does it work?

Best to explain with an example. Let’s assume John Smith’s Single Life Only 100% benefit is $5,000 monthly and his 100% Joint and Survivor Benefit is $4,000 monthly. Our scenario is outlined as follows.

Pension Option Payouts

This means that if John can find a life Insurance Policy that can generate $60,000 of income for under $12,000 annually, he will not only be able to select the Max payout option, but he will assure the continuation of pension income beyond his death.

How much life insurance do you need?

For the sake of simplicity, a good rule of thumb is to use the “4% Rule” to determine cash flow replacement. This formula looks at the safe amount a retiree can withdraw from retirement accounts for income while allowing for cost-of-living adjustments and principal protection. So, for our example, in order to replace $60,000 of income, Mr. Smith would need $1.5 Million in life insurance: $1,500,000 X 4% = $60,000.

This is known as a “rule of thumb” approach. You can consider other methods such as the Needs Based Approach, which sums up an individual’s short-term & long-term needs, such as outstanding debt payments, auto loans, college loans, mortgages, home repairs, etc. It also adds in family expenses and other financial recourses needed. This method is more suitable for someone who wants to replace more than income or is interested in leaving a legacy.

What are the benefits of Pension Maximization?

  1. Allows you to take the maximum benefit without the fear of premature death.
  2. The death benefit proceeds will provide a lump sum of money, tax free. It can replace income or cover major expenses beyond cash flow. Most importantly it leaves the surviving spouse with a choice of how to take full advantage.
  3. Potential access to the Cash Value of the Life Insurance Policy if needed.
  4. Legacy Benefits. This strategy will allow you to leave a tax-free lump sum of cash to heirs, as opposed to the pension income stream.
  5. In the event your spouse predeceases you, the policy can be canceled & the cash value returned.

Is it right for you?

When deciding if Pension Maximization is right for you, it’s important to consider your life expectancy, current health, family obligations, and cash flow needs. Review the cost of the life insurance compared to your cash flow needs. In some situations the cost of insurance may outweigh the benefit.

If this process seems overwhelming or you want to learn if pension maximization is right for you, Cary Stamp & Co. team members are available to help.



Schedule a Complimentary Introductory Call with Cary or a member of his financial advisory team. We look forward to learning about you and sharing our thoughts.
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