For decades, Jim Lusk, CFP has asked retirees a simple question:
“Why are you choosing the survivor option?”
The answer is almost always the same.
“Because I love my spouse.”
There is nothing wrong with that goal. In fact, protecting your spouse is one of the most important responsibilities of retirement planning.
The question isn’t whether you should protect your spouse.
The question is how?
Over more than forty years of helping retirees evaluate their pension choices, Jim has observed that many people elect a survivor pension option without fully understanding the tradeoffs. They simply assume that if the pension system offers it, it must automatically be the best choice.
Before making a permanent pension election, Jim encourages every retiree to understand what he calls the six problems of the traditional survivor pension option.
Problem #1 – You Permanently Reduce Your Retirement Income
Most survivor pension options reduce the monthly pension you receive for the rest of your life.
That reduction may not seem significant when you’re filling out retirement paperwork. But over twenty or thirty years, it can represent hundreds of thousands of dollars in reduced retirement income, especially for pensions that include annual cost-of-living adjustments.
Once that election is made, the reduction is generally irrevocable.
Problem #2 – You May Lose Flexibility
Life rarely unfolds exactly as planned.
Suppose your spouse dies before you do. Under many pension systems, you’ve already accepted a reduced pension to provide a survivor benefit that may never be used. Some pension plans include “pop-up” provisions that restore benefits under certain circumstances, while others do not. Even when a benefit is restored, the income you gave up over the years is generally not returned. Every pension plan is different, making it important to understand your specific rules before making an election.
Retirement planning should be flexible whenever possible.
A permanent pension election often is not.
Problem #3 – You Build No Equity
Imagine setting aside thousands of dollars every year for twenty years.
Now imagine having no access to those dollars if you needed them for a medical emergency, long-term care, or another unexpected expense.
With a traditional survivor pension option, the reduction in your pension does not create an asset you own. You cannot access it, borrow against it, or redirect it if your circumstances change.
Problem #4 – Your Children May Receive Nothing
The survivor pension option is designed to protect a surviving spouse.
But what happens if both spouses pass away?
In many pension systems, the monthly payments stop. After years of accepting a reduced pension, there may be no remaining value that transfers to children, grandchildren, or your estate.
For retirees who hope to leave a financial legacy, this can come as an unpleasant surprise.
Problem #5 – Your COLA IS Smaller
Most public employees are fortunate to have pensions that include annual Cost-of-Living Adjustments (COLA).
What many retirees don’t realize is that those increases are often calculated on the pension amount you actually receive.
If you’ve accepted a reduced pension through a survivor election, every future COLA may also be based on that smaller amount. Over a retirement that lasts twenty or thirty years, the compounding effect can become substantial.
Problem #6 – Your Spouse May Have Only One Settlement Choice
Most survivor pension options are designed to provide a continuing monthly payment to a surviving spouse.
For many families, that’s appropriate.
But life isn’t always predictable.
What if your surviving spouse would prefer a tax-free lump sum to pay off a mortgage? Cover major medical expenses? Help children or grandchildren? Adjust investments? Under many pension systems, those choices simply aren’t available. The benefit is typically paid as a monthly taxable pension according to the rules of the plan.
Is the Survivor Option Always the Wrong Choice?
No.
In fact, Jim Lusk has consistently taught that the survivor option can be an excellent choice for retirees who are unable to qualify for other planning strategies because of health or other circumstances.
If you’re unhealthy, the survivor option may provide the best available protection for your spouse. It is also important to understand any pension rules related to survivor benefits, including provisions that may affect retiree health insurance or other valuable benefits. Every pension system is different, and those details should be carefully reviewed before making a final election.
The goal is not to criticize the survivor option.
The goal is to understand both its strengths and its limitations before making one of the most significant financial decisions of your retirement.
Is There Another Way?
After helping public employees prepare for retirement for more than four decades, Jim Lusk came to believe that many healthy retirees simply didn’t know there was another approach to protecting their spouse. Others learned about it too late or were unable to qualify because of their health.
That led to the development of the The Pension Shield Option™, an alternative planning strategy designed to address many of the limitations discussed in this article while keeping the same goal in mind—protecting the people you love.
If you’re approaching retirement and have questions about your survivor pension options or would like to discuss your specific situation, contact Retirement Nationwide. We’ll help you understand your pension choices, answer your questions, and determine whether the Pension Shield Option™ may be appropriate for your circumstances.