Pension Max and Lump Sum Pension Strategies

Previously, we explored the risks inherent in carrying a pension plan, and some of your payout options. Now, we’re going to explore, in more detail, some specific payout strategies we’ve helped clients with.

Pension Max is one strategy worth considering. Pension Max consists of taking the Single Life payout, let’s say $2,000 a month, vs the Joint Life with 100% Survivor Benefit of $1,750. With a Pension Max, you would then take the $250 difference and buy life insurance on the spouse who carries the pension.

If the spouse with the pension lives a long and happy life, you enjoy the higher income and you are netting out each month what you would have under the joint-life payout. In the event of the death of that spouse, the spouse left behind then inherits the life insurance death benefit 100% tax-free and can use that benefit to replace the income they lost now that the pension has gone away. This provides the surviving spouse with liquid, tax-free money to use as they see fit.

You can modify this concept with hybrid products available that combine life insurance and long-term care insurance. Combining life and long-term care can make the Pension Max strategy even more powerful.

Another option we think clients should consider is a lump sum pension payout. Since taxes on the lump-sum payout would be treated the same as a 401K, IRA, 403B and 457, you could roll it over to a self-directed IRA or combine it with your 401(k) balance.

Why would you do that? Let’s say you have $500,000 in a 401(k) and your pension lump sum option is $400,000. You could combine those into a retirement income strategy and now you have $900,000 to work with in retirement.

The other huge thing to consider is that a pension benefit is not really a part of your estate. Once you and your spouse pass away, that benefit, whatever would be remaining is gone and not passed down to the next generation.

Taking the lump-sum of the pension now brings that balance and value into your estate by moving it into a self-directed IRA or 401(k) and gives us more options in terms of creating income that is inflation-adjusted.

The other silent killer of a pension is that you do not get a raise, but inflation still happens. Pensions are straight life calculations meaning your income is going to be the same until you pass away. Think about how much you paid for your first car. What kind of car would that money buy you today? How about your first house vs your last house? A meal out 30 years ago vs a meal out now? You get the idea.

When looking at your pension income as a percentage of your overall income and combining that with social security, let’s look at how much of your total monthly income might be at risk of inflation.

Let’s say your total monthly income right now before retirement is $12,000 a month before taxes.

Now let’s say you’ve retired. Your pension monthly benefit is $2,500, your social security after Medicare is $2,500 and your spouse’s social security after Medicare is $2,000. That is a total of $7,000 in income.

What the government doesn’t tell you is that since really the 1960’s they have been tinkering and changing the way inflation is measured, for several reasons. One of the main reasons is that inflation is tied to social security. So, if inflation goes up, so does your social security check. If inflation doesn’t go up, neither does your annual benefit. The chart below shows inflation increases since 1975. Over the last 15 years in a low-interest-rate environment, you’ll see how inflation rates have fared. Low inflation is great, except when you are looking for a cost of living increase in social security benefits.

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Notice all those 0% pay increases in the last 15 years? Some increases, but also a lot of zeros!

The other side of the equation with your social security is the connection to Medicare. The government can decide when to raise Medicare costs independent of raising your social security payment.

A lump-sum payout placed in a self-directed IRA gives you more options, options that are not tied so closely with fluctuations of inflation or the whims of the government.

Pensions can be a great benefit when handled correctly. There are options for you on how to manage them. Understanding those options gives you the power to make the right choices for you and your family. No matter what you choose we believe you should know that you have options and information to educate yourself to make an informed decision.