This time of the year many people like to retire or plan their retirement for sometime next year. In 1974 the EMPLOYEE RETIREMENT INCOME SECURITY ACT (originally a 1400 page law) included a significant change in the form of pension benefits that married couples could choose. Prior to the new law in 1974 an individual who retired would–if they satisfied plan rules–receive a single life benefit paid on a monthly basis. The 1974 law changed the form of that monthly benefit to a JOINT & SURVIVOR benefit. The so-called “J&S” benefit allowed a retiring individual to choose either the single life benefit or a lesser amount that would continue on after his/her death as a monthly benefit to their spouse. This change allowed individuals to provide for their spouses’ income even after death. (In fact, if you were married at the time of your retirement, you were required to waive the J&S benefit in writing.) This opportunity has always provided a dilemma for about-to-be-retired individuals. Which form of monthly benefit should I take? Benefit administrators were reluctant to advise prospective retirees for legal liability reasons so very little help was injected into the process. REVELATION: YOUR BLOG EDITOR HAD 40 YEARS EXPERIENCE IN THIS FIELD AND RETIRED MANY EXECUTIVES, INCLUDING CEO’s. I DEVELOPED A SIMPLE BUT, I HOPE, HELPFUL WAY TO HELP ANSWER THE RETIREMENT BENEFIT FORM QUESTION. THE PROCESS OUTLINED BELOW SHOULD HELP ALL MARRIED COUPLES DECIDE WHAT WORKS BEST FOR THEM.
- First, have your Benefits Administrator provide all the monthly benefit forms available to you in writing.
- Second, compare the single life monthly amount to the other “joint & survivor” monthly benefit amounts.
- Third, subtract the “J&S” monthly benefit amounts from the single life amount. This will tell you what the cost (what you will give up) of providing a benefit for your spouse would be if you die first.
- Fourth, using the amount you would “lose” by taking a “J&S” benefit form ask for term life insurance quotes. If you are in relatively good health and can qualify for a standard policy issue you may find that taking the single life benefit and buying a life insurance policy on yourself is a better way to go. If you die first, your spouse will receive the face value of the policy. Such proceeds are now generally paid tax-free. If your spouse dies first, you will continue to receive the full monthly pension and will cancel the life insurance policy.
EXAMPLE: SINGLE LIFE PENSION BENEFIT: $ 1,500/month
JOINT & SURVIVOR BENEFIT: $ 1,300/month
COST OF A $100,000 LIFE INSURANCE POLICY: $160/month
If you can qualify to buy the life insurance policy, you could choose the $1,500/month benefit and pay the $160 premium on the life insurance policy. If you died after 15 years after retirement you would have saved $7,200 and provided your spouse with a $100,000 tax-free insurance benefit. But, if your spouse dies first, you would still continue to receive the full monthly pension benefit.
- Please understand: this is not meant to answer all your questions. It is intended to give you a different perspective on the form of the monthly benefit you choose. As always, talk to your financial advisor.
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