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Todd Radwick | Pension maximization: Getting the most out of your defined benefit pension plan

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Do you have a “defined benefit pension plan through your job, such as TERS, PERS, SERS or LEOFF?” Do you work for a PUD, school district, public works, law enforcement agency, county, city or state? You may want to take a hard look at Pension Maximization.

Pension Max” is a financial planning technique where you analyze how to get the most, highest paying benefit out of your pension, known as the “single life” option, while still protecting your loved ones.

Just before retirement you will face an important decision. You will choose, either the “Single Life” option, which pays out the maximum possible monthly income, and stops after your death — or a “Joint and Survivor” option which will pay a reduced benefit to you during your retirement and continue a benefit to your spouse after you’re deceased. Some pensions pay your beneficiary the same as what you were getting, some a lesser amount. Either way, you have to “pay” in the form of a reduced pension to you.

For example, a “Single Life” option might pay you $6,000 per month. When you die, this benefit stops. The “Joint and Survivor 50 Percent” option will pay you $5,500 while alive, costing you $500 per month in reduced benefits. Your spouse gets 50 percent of that after you’re gone, i.e. $2,750 per month.

If you do take a “Joint and Survivor option,” what just happened? You have purchased a type of life insurance from your department of retirement systems for $500 per month. That’s not what they call it of course, but that’s what it is; you paid money while alive, so that when you die, someone else receives money. That’s life insurance, isn’t it? I think if more government employees with a pension really stopped and pondered this, they would reconsider and want to know more about what type of policy they were actually buying.

The huge irony is this. If you were shopping for a policy on the open market, would you buy one for $500 per month, where you an only pick one primary beneficiary, it had to be your spouse — no one else, such as parents, a brother or sister, or your children and where there’s no contingent beneficiaries allowed? Would you purchase what is essentially a term life insurance policy for $500, where there is zero cash value and no way to recoup your money if your spouse outlives you? For example, if you live for 20 years, you have paid $120,000 in reduced pension benefits. If your spouse predeceases you, you can’t get this money back. Conversely, other policies may be a cash value type policy where you can get back everything you paid in, and even gains/interest on top of that. Another thing. Once you sign up, you can never change it or cancel it while your beneficiary is alive.

I pose the question again. Would you consider purchasing a policy that looked like this? Never, right? Yet every day, government employees are doing exactly that by selecting the “Joint and Survivor” option and think nothing of it. I believe it’s because no one has ever explained that they are essentially buying a type of very restrictive life insurance without many options. They haven’t connected the dots.

What’s the alternative? Take the “Single Life” option, paying you the full $6,000 per month, and earmark that $500 per month you would have paid in reduced benefits to purchase a flexible policy without all the restrictions and limitations. But don’t wait procrastinate and put it off to the last minute. You have to medically qualify.

Done correctly, using Pension Maximization can be a very powerful technique to help you to get the maximum income from your pension, while still taking care of your loved ones in the most flexible ways possible.

 

Todd Radwick, DIA, and president of Radwick Financial Group LLC is an insurance and financial adviser based in Winthrop and serving all of Washington. He can be reached at 996-3425 or by viewing his website at radwickfinancial.com.