Jerod Fenton
CFP®, RFC, CSA
Senior Financial Advisor

Although Pensions seem to be going the way of the Dinosaur, there are a few of us fortunate enough to have an employer that is at least partially responsible for providing retirement income.

My Father has been a teacher for the last 35 years and one of the perks that he will enjoy as a result is benefiting from one of the strongest pensions available. My father's pension plan, like most pension plans, requires him to make an irrevocable election on how he would like to receive his benefits. For simplicity sake, let's assume there are three options;

1. My father can take 100% of the benefit, I will assume $4,000 monthly, for himself and my mother will get nothing if my father passes away prior to her.
2. My father can take a reduced benefit, I will assume $3,750 monthly, and now if my father passes away prior to my mother, she will receive one half of my fathers benefit, $1,850, for the rest of her life.
3. My father can take a reduced benefit, I will assume $3,500 monthly, and now if my father passes away prior to my mother she will receive the full amount of my fathers benefit, $3,500, for the rest of her life.

For most people the decision they make regarding their pension income will be no more sophisticated than electing one of their three options. Typically if someone is married they will elect option 2 or 3, otherwise they may not be married much longer! If there is no spouse in the picture, election option 1 probably makes the most sense.

My father wanted to provide for my mother in the event that he predeceased her, so in his mind he needed to elect option 2 or 3. The problem in doing so is that he and my mother will give up $250 or $500 a month in income without any guarantee that they will receive a benefit from doing so. For example, if my father lives another 30 years and my mother lives another 29 years the spousal benefit will never be paid out. Let's assume my father had elected option 3 for his pension distribution, giving up $500 a month for 30 years for a total $180,000, and for this he gets nothing.

There may be a better way! I had my father elect option 1 so that he receives the full pension benefit. I then used $350 of that monthly benefit to purchase a $750,000 life insurance policy on my father that would more than replace the monthly pension benefit that he receives. If my father passes away prior to my mother, the life insurance benefit will be payable to my mother. There is a good chance that at my mothers passing there will be a remaining portion of that life insurance policy that can be passed to heirs, unlike the pension benefit.

If I can be of assistance for your financial planning needs please call 760-546-0273.

John E. Richardson, Jr., CPA, CFP® is a Senior Financial Advisor with Strongtower Financial in Escondido. If you have any questions or comments, please contact him at (760) 705-3520 or by e-mail at jrichardson@strongtowerfinancial.com.