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  • Posted March 11, 2016

Pension Maximization

You may hear, or have been told, to take advantage of something called “pension maximization” – especially if you’re a Federal employee. So what does this mean?

Traditionally those receiving pensions have the option to take a reduced benefit to provide a continuing benefit for a surviving spouse and/or family member. Pension maximization involves purchasing a life insurance policy to provide the same income benefits, and allowing the retiree to receive the full pension benefit – secure in the knowledge their spouse or loved one would be provided for after they’re gone.

If this was the only consideration I would have nothing to write about – because in many cases this will make the most fiscal sense. However, the retiree needs to be sure they understand if and how this could affect their spouse and/or loved ones’ continued healthcare benefit. In many cases, Federal employees being an example, in order to continue receiving health care benefits there is a minimum transfer requirement – meaning the retiree must take a reduced benefit of some type. How much will depend on the plan, and warrants a discussion with your advisor/planner.

This doesn’t rule out pension maximization; it should, however, spark a discussion around alternatives. Perhaps insurance is still a more cost effective option, adding additional death benefit to bridge the gap created by the loss of the health insurance coverage. Maybe it’s a better idea to do a hybrid solution – reduce the pension by the minimum amount required to keep the health insurance, purchasing life insurance to make up the difference. Or you may decide it doesn’t make sense to get the insurance – based upon a cost/benefit analysis. There is no cookie cutter solution, everybody’s situation is different – the common denominator is taking the time to understand what fits your situation best.

It’s up to you to understand what your benefits are. There are many advisors/planners who can/will help you, and your HR department is another resource. Beware those who attempt to sell you on this idea without explaining the pros/cons; and working with you to determine which solution best fits your solution.