Millions of employees have a Defined Benefit pension plan. Typical among them are government employees, educators, circuit judges, union members, police and fire fighters, etc. Defined Benefit plans usually base the retirement pension income benefit on age, the number of years of credited service and final average salary. Then, at time of retirement, there are several pension income options from which the retiree must choose.
If the retiree wants to provide an income for a spouse on his/her death, then the retiree has the option to take a reduced pension, a spousal reduction. However, if after say 20 years of reduced pension income the retiree’s spouse dies first then the pension reduction was for naught. Once a pension income option has been chosen it cannot be changed except when a retiree’s spouse dies first the retiree will go back to a life only option.
However, instead of reducing a pension income to provide for a spouse the retiree could elect the “life only” option (the maximum pension income) then put the amount of the “spousal reduction” into a life insurance policy that the retiree owns, one that will eventually provide income tax-free money to the retiree’s beneficiary/beneficiaries.
Pension Maximization “PenMax” is not an option offered by the retiree’s plan but it is a way for a retiree in reasonably good health to receive the maximum pension income and provide for a spouse by way of income tax-free life insurance in the event of retiree’s death.
Call if you are getting ready to retire and would like to know if Pension Maximization is right for you.