A:

Pension maximization refers to a strategy for choosing a payout option at the time of your retirement. Employees near retirement age may be faced with a rather difficult decision when presented with the retirement plan payout options. Most pension plans will offer the participant at least two common payout options: single-life payout or joint-life payout. Under the single-life payout, your pension check will be higher - but it stops at the time of your death. Under the joint-life payout option, the pension check will be smaller - but it continues to pay even after your death, to your spouse. So, if your spouse outlives you, he/she will continue to receive your pension check until their death.

For example, let's assume the single-life pension payout for a 65-year old is $5,000 per month and the joint-life pension payout for you and your spouse (age 62) is $4,000 per month.

Under the pension maximization strategy, the employee would select the single-life $5,000 per month payout, which is $1,000 more per month (or $12,000 per year), rather than the joint-life payout. However, instead of spending this extra $12,000, the employee buys a permanent life insurance policy on himself/herself for the largest death benefit that a $12,000 annual premium will buy with the spouse as the beneficiary. When the employee dies, the pension payout stops; however, the spouse then receives a large death benefit payout (tax-free) which can be invested and uses to replace the taxable pension payout that is no longer available.

It is very important that the employee first applies and qualifies for the appropriate amount of life insurance prior to making their pension selection. The pension selection is usually irreversible, so you'll want to make sure that you are insurable and offered a reasonable life insurance policy prior to committing to the higher single-life pension payout amount.

Learn more about annuity payouts in our article, Selecting The Payout On Your Annuity.

This question was answered by Steven Merkel.

RELATED FAQS

  1. What protections are in place for a whistleblower?

    Read about the possible protections offered to American whistleblowers who report on the illegal activities of their employers ...
  2. Does my employer's matching contribution count towards the maximum I can contribute ...

    Maximize 401(k) contributions on your own without fear; employer contributions are separate and do not hinder you contributing ...
  3. How much will an employer generally contribute to a 401(a) plan?

    Find out how much employers may contribute to an employee's 401(a) retirement plan and why this amount can vary so widely ...
  4. When can benefits be received from a provident fund?

    Find out when participants in provident funds can begin receiving benefits, including how funds can be used to finance important ...
RELATED TERMS
  1. Ex Gratia Payment

    A payment made to an individual by an organization, government, ...
  2. Poison Put

    A takeover defense strategy in which the target company issues ...
  3. Assented Stock

    A share of stock owned by a shareholder who has agreed to a takeover.
  4. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  5. Back-End Plan

    An anti-acquisition strategy in which the target company provides ...
  6. Voting Poison Pill Plan

    An anti-takeover strategy in which the company being targeted ...

You May Also Like

Related Articles
  1. Investing Basics

    Will Nepotism Kill Wal-Mart?

  2. Stock Analysis

    Is Bank of America Turning Around?

  3. Investing

    Has Nepotism Ever Worked?

  4. Investing Basics

    Shareholders: Vote Your Proxy and Be ...

  5. Personal Finance

    The 6 Biggest Fortune 500 Employers

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!