For most workers, pensions are a thing of the past. The days
when a company would provide you with a lifelong retirement income based on
your years of service is rapidly becoming a relic of the 20th
century.
However, there are still millions of workers nationwide who
retire with a “guaranteed” monthly income, especially among government
employees and many union members. (The pension “guarantee” is not as reliable
as it once was as some state governments in recent years cut retirees’ pensions
to help balance budgets.)
For those who do include a pension as part of their
retirement income portfolio, an important decision must be made: whether or not
to forfeit part of your pension earnings for the remainder of your life in
order to leave money to your beneficiary or spouse after your demise.
It’s a decision that comes with some risk. If you reduce
your pension payments for the purpose of providing an income for your
beneficiary (or multiple beneficiaries) you accept the risk that they may
predecease you. In the event that happens, you will have given up part of your
pension for naught.
Once you make this decision it is permanent and cannot be
changed.
Before you make a decision that could potentially leave a
lot of money on the table, you might want to give some thought to other
creative solutions that could achieve the desired results without as much risk.
For example, if you are relatively or very healthy, you
might consider purchasing a life insurance policy instead of forfeiting part of
your pension. A life insurance policy can be designed with flexibility, to
either provide beneficiaries with an ongoing income after your death or a bulk
death benefit payout.
In nearly all cases, the premium amount you will pay for a
life insurance policy is less that the amount you would sacrifice from your
pension every month.
One recent example comes to mind. A 62-year-old client of
mine was considering giving up more than $300 per month from her pension in order
to provide her beneficiaries with 50 percent of the pension. Instead, together we
found a life insurance policy that will provide for her beneficiaries at her
desired level for one-third the amount she would have paid—approximately $100 a
month.
In addition, the life insurance payout will be tax-free and
will not be subject to probate court process. And she can change her
beneficiaries at any time.
Best of all, she gets to keep her entire pension, but with
the knowledge that her beneficiaries will receive a tax-free income after she
is gone.