Dear Rick:

I am 66 and going to retire in a couple months and I’m lucky enough to get a pension.  I met with the company’s H.R. person to go over my options.  Basically, I have two options:  I can take the pension with a joint and survivor benefit, or if my wife agrees, the pension can be just based upon my life.  Obviously, if I take the pension just on my life the payment is substantially higher.  My gut feeling was that I should take the joint and survivor option as I know my wife will need the money if I predecease her.  However, I was approached by a friend of a friend who sells insurance and he told me a better way of going is to take the pension just on my life and then to buy a life insurance policy on myself with my wife as beneficiary, so if I predecease her she will have the proceeds from the insurance policy.  I am not sure which way to go.  I would appreciate your thoughts.  You should know my wife is five years younger than me and that my pension and Social Security will cover all our needs and a little more.  I also have about $250,000 in all my investments.

Thanks.

M.M.

Dear M.M.:

I believe in your situation the smart way of going is to take a joint and survivor pension.  By taking this option you’re protecting both you and your wife during both of your lifetimes.  While you both are living, as you mentioned, your Social Security and pension will cover all your living expenses and more.  This allows you to let your portfolio reinvest and grow until it is needed to supplement your lifestyle.  At the same time, if you wife survives you, she is also going to be in excellent financial shape because she will have the pension and Social Security as a great base and any additional needs would be supplemented from the portfolio.  In addition, if you and your wife want to occasionally splurge in retirement, such as take that dream vacation, you can do so knowing that you have your backside is covered.

The main problem I have with buying life insurance is based upon a few issues.  The first issue that I’ve seen happen more than once is for whatever reason, the life insurance premiums don’t get paid and the policy lapses.  In that situation, your wife could be in a difficult financial situation because other than the portfolio, all she would have would be Social Security.  Of course, she could draw down from the portfolio, but the question is how long it will last.  The two unknowns you have are how long you will live and what return will she get when she receives the insurance proceeds.  Because of these two unknowns, I believe the insurance route is a much riskier way to proceed.

Many people may be surprised to hear that for those receiving pensions, they have a choice between basing a pension on their life or if married, a pension that continues for the latter of their or their spouse’s death.  There is, however, a caveat that is important.  For married couples, you can select a pension based only upon the employee’s life; however, both spouses must agree to that and sign off in writing.  Therefore, unless both spouses agree, the joint and survivor pension is going to be the required option.

If you are going to receive a pension, it is important to analyze all the options and make the choice that best suits your needs.  You shouldn’t do what your best friend or your next door neighbor is doing; rather, you should do what works for your individual situation.   The key is to take your time, ask questions and if you need professional advice, seek it from someone who will truly give you independent professional advice.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com