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Choosing Your Pension Payout Option
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any couples find them -
selves confronted with a
dilemma as retirement nears. If you
plan to receive your pension payout
on a monthly basis (rather than in a
lump sum), you must decide whether
you want to receive a higher payment
during your lifetime (the life option)
or a lower payment that will span the
lifetimes of both you and your spouse
(the joint and survivor option).
The Best of Both Worlds
Deciding between these options
may leave you and your spouse feeling as though you are betting on each
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.
As you choose between these options, you will need to consider the
current and anticipated health of both
you and your spouse, as well as your
life expectancies. You will also need
to assess your financial situation and
income requirements. Here is a brief
look at each of these payout options:
Life Option. With this option,
let’s assume you receive $1,700 per
month for your lifetime. This will be
higher than the amount you would
receive with joint and survivor benefits, say by $475. If you live a long
life, 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.
This could have a significant impact
on his or her standard of living.
Joint and Survivor Option. If you
were to select the joint and survivor
option, suppose you receive $1,225
per month ($475 less than with the
life option). If you die before your
spouse, payments to your surviving
spouse will continue for his or her
lifetime. 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, you cannot change
your payout option, even though
your reason for choosing the lower
monthly benefit to protect your
spouse’s long-term income is no
longer applicable.
other’s lives. But, you need not be
locked into an “either-or” situation.
With proper planning, you may be
able to have it both ways—a higher
monthly benefit now plus continuing
income for your surviving spouse
should 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 permanent
life insurance policy on yourself. If
you should die first, your surviving
spouse can manage the insurance
proceeds to help create monthly
income, as needed. On the other
hand, if your spouse should predecease you, you can cancel the policy
and continue receiving the higher
monthly pension benefit.
This strategy requires disciplined
money management to achieve the
desired results. First, your life insurance policy may lapse if the premiums
are not paid. Second, a lump-sum
death benefit must be properly
managed to yield the anticipated
Finally, the issuance of a policy at a
reasonable premium (which would
depend on your age and health) is
not guaranteed. Therefore, it is important to apply and verify that you
qualify for the appropriate amount
of life insurance prior to making the
pension payout selection. If the premium consumes too much of your
monthly payout, this strategy may
not be feasible.
Consider All Your Options
When choosing between the life
option or the joint and survivor payout option for your pension, coupling
the life option with a life insurance
policy may be appropriate. There are
many factors to consider, including
your age, your spouse’s age, your
health, your actual pension benefit,
and the insurance premium costs. It
is always important to analyze your
situation carefully with the assistance
of a financial professional to help
determine which approach may work
best for you. ?