How to Maximize Your Pension Plan Payments in Retirement
Your airline's pension plan, or defined benefit plan (A Plan/PBGC), is designed to provide you with a lifetime of income in retirement—your retirement “paycheck.” The income you receive from your pension plan is determined by a formula based on years of service, your earnings and age. When the time comes for you to retire, your plan offers a number of payout options. Determining which option will benefit you the most takes some careful thought. As a general rule, most plans no longer offer a lump‐sum distribution option allowing a full payout of one's pension account balance. Your pension plan will usually offer two basic payout options: a single life payout and a joint life payout.
Option One: Single Life Pension Payout
This monthly amount will be paid to you for as long as you live; however, upon your death, the pension payout stops. For this reason, most married people consider the joint life pension payout option described below. While the single payout typically pays a larger amount than the joint life payout option, it may not be the best option if you are married. In fact, the joint life 50% pension payout option is the federally mandated option unless the spouse consents to another option.
Option Two: Joint Life Pension Payout
Many married couples choose the joint life pension payout so a payment will continue to your spouse upon your death. The advantage of the joint life pension payout is that upon your death, your spouse will continue to receive a percentage of your benefit for as long as your spouse lives. However, when a pension plan has to payout over two lifetimes, the payment to you, the retiree, will be less than the single life payout option since the payout now has to cover two lives.
Deciding What's Right For You
So, which option do you choose? This is a tough decision. Do you take the single life pension payout option to secure the highest pension payment even though it would disinherit your spouse at your death? Or, do you take the joint life pension payout option, a reduced payment to guarantee your spouse maintains a lifetime pension payment when you die? One other drawback to the joint and survivor option is that if your spouse predeceases you…you are unable to name a new beneficiary or change the payout option. This lack of control is what many people, especially pilots, dislike about the two most common pension plan payout options.
Alternative Option Three: Pension Maximization
A more flexible option may be available to you, and is often referred to as pension maximization. You, the retiree, would elect the higher single life option, taking the largest pension payment you are eligible for, and then purchase an appropriate amount of life insurance and name your spouse as beneficiary to the policy. Upon your death, your pension payment stops. However, your spouse will receive a tax‐free death benefit from the life insurance policy that can be invested or used to purchase a pension type annuity providing your spouse with lifetime income. Under the pension maximization option, should your spouse predecease you, you can change your life insurance beneficiary (children, estate, etc.) or cancel the policy, while you maintain the higher single life pension payout. In many situations, we have seen this pension maximization strategy provide:
- More control
- Greater flexibility
- Less cost compared to the joint survivor option from your pension plan
How An Advisor Can Help
It is important to evaluate the pension maximization option before you retire and need to make your irrevocable pension decision. We suggest you contact an investment advisor who has worked with pilot pension programs and have them walk you through the various pension payout scenarios. Having this discussion with an advisor and your spouse 5 to 10 years prior to your retirement date helps you make the best and most informed pension payout decision. We work with pilots to “run the numbers,” review the pension payout scenarios and even help secure the appropriate amount of life insurance. Your optimal retirement paycheck depends on your ability to review your options ahead of time and make the best, most informed decisions for you and your family.
To learn more about how to maximize your retirement paycheck and work with someone who has helped hundreds of pilots with these decisions, please contact The Pilot Program Team from Johnson Financial Group.
Pension Maximization is an insurance industry term used to describe a strategy that combines the single life pension option with life insurance.
by Robert Warner
Robert Warner is Managing Director, The Pilot Program, Johnson Financial Group and EVP Johnson Wealth, a Johnson Financial Group Company. He is also a Chartered Financial Consultant (ChFC®). He has over 25 years experience helping clients, including active pilots and their families achieve their retirement and estate planning goals with an emphasis on estate conservation and wealth transfer planning.READ MORE about Bob Warner.
Johnson Financial Group and its subsidiaries do not provide tax advice. Please consult your tax advisor with respect to your personal situation. Wealth management services are provided through Johnson Bank and Johnson Wealth Inc., Johnson Financial Group companies. Additional information about Johnson Wealth Inc., a registered investment adviser, and its investment adviser representatives is available at https://www.adviserinfo.sec.gov/. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE