Often we don’t recognize the beauty of something until it’s gone. That’s how I feel about pensions. A monthly stream of guaranteed income, sometimes inflation-adjusted, for the rest of your life is a beautiful thing.
When I entered the workforce, many major corporations included a pension in their benefits package. Today that number is less than 20 percent. However, pensions still exist. The military, many teacher retirement systems and millions of federal government jobs typically offer pensions. And when it comes time to receive those pensions, the decision of whether to choose a survivor benefit option looms large.
The offerings differ from plan to plan, but at the core you elect to receive a smaller monthly check in exchange for your survivor receiving a continued benefit, at some level, when you die. For example, the military’s Survivor Benefit Plan (SBP) provides the survivor 55 percent of the covered retirement benefit at a cost of 6.5 percent.
Let’s look at how this would work for a military retiree receiving a monthly retirement check of $2,000. The retiree would pay $130 per month for SBP coverage (thus receiving a smaller monthly check while he or she is alive), and if that person died today, his or her surviving spouse would continue to receive $1,100 per month with inflation adjustments each year.
It’s a big decision, and every situation is different. If you’re getting ready to make up your mind, here are six things to consider:
- Look at the overall protection plan. The decision to elect a survivor option does not happen in a vacuum. Your existing insurance coverage, accumulated assets and other income streams all figure into your financial picture. The bigger the role a pension plays in your income plan and the fewer the other supporting elements, the more likely you may be to say “yes” to a survivor benefit option.
- Monthly income is valuable. It’s often a surprise to clients when I put a price tag on the values of their pensions. A couple of thousand dollars a month can equate to hundreds of thousands in lifetime value. That makes the survivor benefit decision critically important. Don’t underestimate the value of your pension. A pension of $2,000 per month received for 30 years is worth around $400,000. Add inflation adjustments, and that value skyrockets to nearly $600,000 (over a 30-year period, 4 percent discount rate and 2.5 percent inflation).
- Assess your income sources. At its core, a pension provides monthly income you’ll use to cover everyday expenses. However, it’s not all you’ll have. Your spouse’s pension, Social Security and perhaps annuity income can all play a role in your retirement income plan. Racking and stacking your core expenses – food, utilities, health care, insurance, etc. – and ensuring you have enough money to cover it all is ideal. Consider what will happen if the pension goes away. Will you be OK?
- Insurance can be a substitute. Life insurance provides a lump sum at the time of your death. That money can be used to re-create the income provided by a pension. However, it’s important that the life insurance policy you have is adequate and in place at the time of your death. Obviously, most of us don’t know when we’re going to pass away, but buying a 10- or 15-year term policy at 62 in lieu of choosing a survivor pension benefit could leave your loved one with no coverage or recourse if you die after the coverage expires. That’s why when people are considering life insurance instead of a pension survivor option, I caution them against falling in love with an inexpensive option (term insurance) that might not be there when you need it.
- Life expectancy and health matter. The tables used by insurance actuaries may not dovetail with your personal situation. There’s a 99.9 percent chance that the next airplane you get on will deliver you safely to your destination. Of course, that statistic isn’t helpful if the unthinkable happens. If your spouse is older or in bad health, or you’re a woman married to an older male, a survivor option may make less sense.
- Read the fine print. Some survivor health-care coverage or other benefits may be contingent on your receiving your deceased spouse’s pension. This could be a critical element of your overall financial security in retirement. Read the fine print. If your spouse was in a job that didn’t pay into Social Security and receives a pension, he or she could be eligible for a lot less in Social Security benefits; this could make a survivor option more important.In short, choosing the survivor benefit option is a big decision – so significant that federal law requires a spouse to sign off on it. So do your homework, and make a plan that works for you today and into the future.
J.J. Montanaro is a certified financial planner with USAA’s Military Affairs Advocacy Group. USAA is The American Legion’s preferred provider of financial services.