Helping couples navigate the pension payout puzzle

By Paul G. Provencher, CRPC Many couples find themselves confronted with a dilemma as retirement nears. If you plan to collect your pension on a monthly basis (rather than in a lump sum), you must decide whether you would prefer to receive a higher payment during your lifetime alone (the life option) or a lower payment that will span the lifetimes of both you and your spouse (the joint and survivor option). How the payout choices work In choosing between these options, you will need to consider such things as the current and anticipated health of both you and your spouse, how long you each expect to live (this is getting longer), your financial situation; expected inflation and your income requirements. Retirement plans may have different options or variations and here is a brief look at how the basic options work: Life Only Option. With this option, let's assume you receive $1,700 per month. This will be higher than the amount you would receive with joint and survivor option, say by $475. If you live to a ripe old age, this extra $475 per month will undoubtedly come in handy. On the other hand, once you die, payments to your surviving spouse, who may live for many more years, will stop completely. This could have a significant impact on his or her standard of living. Of course, in order for the plan to allow you to accept this benefit your spouse will be obliged to agree in writing. Joint and Survivor Option. If you, as the pensioner, select the joint and survivor benefit option; you would receive $1,225 per month ($475 less than with the life option). If you die first, payments to your surviving spouse will continue, at an agreed upon amount (100%; 75%; 50% etc.). This may help provide critical income for your surviving spouse, especially if he or she outlives you by many years. However, if your spouse dies before you, most plans don't allow you to go back and change your decision. And even if they do, you have lost years of income, while your spouse was alive. Protection for a second spouse (remarriage) is generally not allowed. The best of both worlds Deciding between these options may leave you and your spouse feeling as though you are betting on each other's lives. But, you need not be locked into an "either-or" dilemma. With proper planning you can have it both ways a higher monthly benefit now, plus continuing income for your surviving spouse in the event you die first. In structuring this approach, you would select the life option and use a portion of the higher monthly benefit to purchase a life insurance policy on yourself. If you should die first, your surviving spouse, as your beneficiary, can manage the insurance proceeds to help generate the monthly income he or she needs. On the other hand, if your spouse should predecease, you continue receiving the higher monthly benefit, and have many options with the life insurance including : 1) you can access the policy's cash value, through loans and withdrawals, while you are alive; 2) you can change the policy's beneficiary naming your children or a second spouse; 3) you can pay the premiums with accumulated dividends and numerous others. Despite its advantages, this strategy requires disciplined money management to achieve the desired results. First, your life insurance policy may lapse if the premiums are not paid. Any loans or withdrawals will generally lower the policies death benefits and policy cash values. Second, a lump sum death benefit must be properly managed to yield the anticipated income. Third, by waiving the spousal provision, your spouse may lose other pension-related benefits, such as cost-of-living adjustments or company-sponsored health insurance. Fourth, the issuance of a life insurance policy is not guaranteed. You should proceed carefully with this approach until a policy has been issued in your name. Finally, the issuance of a policy at a reasonable premium (which would depend on your age and health condition) is not guaranteed. If the premium takes up too much of your monthly pension amount, this strategy may not make sense. Consider all your options When faced with the dilemma of choosing between the life option or the joint and survivor payout options, coupling the life option with an insurance policy may provide the best of both worlds. It is always important to consider your overall retirement, investment and estate plan to help determine which approach may work best for you. Consulting with a financial professional specializing in these matters may be time well spent. Paul G. Provencher, CRPC, is located in Wilbraham, MA. Financial information is available by calling Paul at 413-596-0000. Paul Provencher is a Registered Representative of and offers securities and investment advisory services through MML Investors Services, Inc., Member SIPC 1500 Main St., 12th floor, Springfield, MA. 01115, (413) 781-6850. Provencher Financial Services is not an affiliate or subsidiary of MML Investor Services, Inc. Life insurance is offered through Massachusetts Mutual Life Insurance Company and other fine lifeinsurance companies. # 86085