Should you split your pension payment with your spouse, even if it means less money?

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Dear Fix My Portfolio,

My wife and I got married in 2023. I am 58 and she is 55. I retire in June 2025 at 59 and will receive three pensions. I already get one of those, which costs $1,000 a month before taxes.

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For the other two, we have to decide if it’s worth going for a survivor benefit, which would lower the monthly amount, or just pay my pension for life, which would mean a higher monthly payment, but it would be over . upon my death. If I add her to the benefit, she would receive 50% of the lesser of each of these two pensions in the event of my death. One is worth $4,500 a month at full benefit and would start when I retire, and the other is $1,450 a month but doesn’t start until age 67.

Instead of taking survivor benefits, we are considering taking out a $1 million life insurance policy on myself, with my wife as the beneficiary, to replace the lost pensions if I predecease her. The cost of this insurance is about $700 per month. I wonder when to take social security too.

Pension Quester

Dear Quester,

This is a basic maths question that many couples with pensions face, especially in cases where the main earner is older.

The cautionary tale I have for you is one from my high school days. I had a teacher who was faced with this decision in retirement and chose the higher pension amount without survivor’s benefit for his wife. Then she had a heart attack and died three months after she stopped teaching, leaving her with no guaranteed income.

It didn’t think about the step you’re considering, which is to add life insurance to replace retirement income. It’s smart to think of it as an either/or sentence. The lower-earning spouse, who often also has a longer life expectancy, needs protection against the other spouse’s loss of income. Whatever you do, make sure you have one or the other. While you’re at it, think of Social Security the same way, because it’s also like a pension that has a survivor option for you.

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The math comes into play because the choice you make is simply the option that gives you the most profit.

“The question is, can I replace the survival option with insurance?” said Natalie Karp, an independent insurance broker in New York who deals with this situation often. When clients present her with this dilemma, she has an equation to help them make the decision.

In your case, you would first want to calculate the difference between the $5,950 of the two combined pensions and what your wife would get at 50% of the reduced survivorship pension amount. That becomes your line in the sand, so to speak.

“Basically, if the cost of life insurance is greater than the difference, the analysis fails. They should keep survivorship options,” Karp said. If the cost of insurance is less than the difference, you’d want to go that route.

Long term planning

But it’s a little more than that. You don’t want to take out a $1 million life insurance policy and not put that to work to replace the income you’ll lose. That million dollar policy you priced out might not even be the right amount to replace the income gap you’re trying to fill.

Let’s say the difference is $2,500 per month. Karp suggested that $1 million might be more than you need. “You might only need $500,000. That could get you a 20-year term policy,” she said. You can also combine this with a guaranteed universal life policy to cover the possibility of the older spouse surviving the term, and even add long-term care insurance – “if you want to be a bit fancy,” he said Karp.

If the retiree dies and the younger spouse receives the life insurance payout, which is tax-free, Karp suggests placing it in a single-premium immediate annuity, or SPIA, which would create a spousal lump sum lifetime income stream. would have waited since retirement. This is the important final step that would replicate the survivor benefit of the pension.

“Boom, there’s your magic,” Karp said. “You want to use that $500,000 death benefit for an income stream.”

If that sounds like a lot of work, it is. If you’re on your own with this, it might be easier to take the survivor benefit and know it’s guaranteed. But if you can work with a professional you trust who has access to all the policy information and works with these scenarios frequently, you can make the math work in your favor.

Social Security, by the way, works in a similar way. A strategy many couples use when the lower-earning spouse is younger is for that spouse to claim when they turn 62, while the older, higher-earning spouse waits to claim until they reach age maximum benefits of 70 years. At that time, the younger spouse can claim a spousal benefit if it is greater than their own benefit. If the older spouse dies first, then the younger spouse would receive the larger benefit as theirs if they both reached retirement age by then.

Whatever you do, think about all your options, taking into account all the variables at your disposal. The decision you make should be precise.

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