What is Pension Maximization?

Pension maximization is a retirement income strategy for couples. The goal is to “maximize” the pension benefit and offset risk with other avenues. Let’s take a closer look at how this strategy could benefit you and your spouse.  

For this strategy, one spouse opts for the highest annuity payout for their lifetime (single-life annuity) and obtains a life insurance policy to provide income for the surviving spouse. 

So, if one spouse has a pension and is in good health, they would elect a single-life annuity pension payout, which offers the most substantial monthly payments but forgoes survivor benefits to “maximize” their monthly amount.

While pension maximization may be a higher-risk income strategy, the ‘reward’ can be substantial if all goes well.

How Pension Maximization Works

To fully understand pension maximization, you first need to understand the difference between single life annuity and joint-and-survivor annuity

A single-life annuity means that you will receive payments for the rest of your life. In contrast, a joint-and-survivor annuity allows you and your spouse to receive monthly income payments for as long as you both live. Unsurprisingly, the monthly payments will be higher with a single-life annuity versus a joint-and-survivor annuity.

Pension maximization can be tricky, so let’s break it down into four steps:

  • Step 1: The plan participant buys enough life insurance to replace some of the survivor benefits that the spouse would have received under a joint-life annuity. 
  • Step 2: Upon retirement, the plan participant chooses the single life annuity option.
  • Step 3: If the plan participant dies first, the insurance company pays a tax-free death benefit to the surviving spouse.
  • Step 4: The surviving spouse can use the death benefit to replace all of the pension income lost when the plan participant died by purchasing a fixed annuity, or investing the proceeds.

To complement this strategy, a plan participant might look at a more considerable life insurance benefit to support their spouse if something happened to them unexpectedly.

The Advantages and Disadvantages of Pension Maximization

If all goes according to plan with a pension maximization strategy, the family will have more money available to spend in retirement while both partners are alive without eliminating the funds available following a death. Pension maximization also allows you to allocate any unused life insurance funds to your heirs.

Of course, not everything always goes according to plan. There are a few drawbacks to consider when it comes to pension maximization. First, it can be a risky strategy, as it involves other financial products such as life insurance, and possibly another fixed annuity. You’ll have to carefully evaluate each spouse’s health, your cash flow, other sources of retirement income, risk tolerance, tax consequences, and more.

How to Make the Best Choice for Your Relationship

When deciding if this strategy makes sense for you, it comes down to a few key factors:

  • The health of the plan participant
  • Their life expectancy
  • The overall financial health of the couple 

Pension maximization strategies can be complicated, which is why a financial advisor should guide the conversation. If you’re interested in learning more, contact our team. We’re here to help you navigate your pension, and to help you prepare financially for retirement.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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