U—Pension Maximization

Upon retirement under a qualified pension plan, married workers and their spouses are often faced with making a difficult decision regarding the desired payout election. Basically one of two elections may be made: (1) to take a reduced monthly income with a survivor income benefit providing for payments during the lifetimes of both the retiree and his spouse; 2 or (2) to take an increased monthly income for the lifetime of the retiree without provisions for a survivor income
benefit. Although plans differ, typically when the survivor income benefit is elected there is a reduction of 25 to 30 percent. The reduction will depend upon the survivor option selected. For example, if a straight-life benefit pays $2,100 per month, a joint and full survivor benefit might pay $1,600 per month, whereas a joint and one-half survivor benefit might pay $1,800 per month to both retiree and spouse and $900 per month to the survivor. Typically these
options are said to be “actuarially equivalent,” in that at retirement they annuitize the value of the retiree’s pension benefit according to actuarial tables.

CURRENT PENSION PLAN. For example, assume that the election under the current pension plan involves a choice between a retirement benefit of $1,600 per month to both husband and wife, or $2,100 per month for the retiree only. This difference of $500 per month can be viewed as the “cost” of securing a survivor benefit for the retiree’s spouse. The election must be made prior to retirement and under most plans it is irrevocable once retirement begins.