Pension maximization

The pension dilemma: should you take your full pension benefit or a option that continues benefits for your spouse if you die? The reduction in monthly pension benefits for survivor options can be pretty large. That's where the concept of pension maximization comes into play.

At this point we'll acknowledge the obvious: none of this is relevant unless you have a traditional pension. And in the private sector, defined benefit pension plans are an endangered species. But for all you government employees (and a few lucky souls in private industry), keep reading.

Let's say that you are retiring with a pension benefit. If you elect the full benefit, you will get $30,000 a year. But if you die, your spouse gets nothing. If you elect a 100% joint and survivor option, your benefit goes down to $25,000 per year, but your spouse would continue to receive that amount if you die. There may also be a 50% joint and survivor or other options. (All of these numbers are for illustration only.)

So you can take the full $30,000 per year and hope you don't die before your spouse or take $25,000 per year and protect your spouse. But what else could you do with this $5,000 reduction? Pension maximization advocates answer: "Buy life insurance." In effect, take the full $30,000 pension and use some part of the $5,000 to buy life insurance on yourself to protect your spouse from the loss of income if you die.

Does this really work? Sometimes. But the experts are divided. One camp (usually life insurance companies and agents) promotes the concept; another camp (often pension plan administrators) counsels against it. Why? One reason is that life insurance agents/companies make money selling insurance. On the other hand, pension plan administrators really don't want everyone taking full pension benefits. There are other reasons of course, but the obvious conclusion is that you need to carefully consider all the options and seek independent financial advice.