Wednesday, November 28, 2012

Retirement and Life Only Pension: Part 2

When planning for retirement, challenges can arise. In the previous blog post we discussed the issues that may arise with life only pensions. In some cases, a life insurance policy purchased prior to retirement can be a great solution. Life insurance policies can potentially provide the security you need to cover several scenarios.

       If the retiree pre-deceases their non-working spouse, the non-working spouse should have enough life insurance in place to purchase a pension, annuity or investment that will give them income for the rest of their life. 
       If the retiree and non-working spouse both die, the life insurance policy should be structured so that their children or heirs can benefit.
       If the non-working spouse passes away first, the retiree has several options.  They can keep the life insurance policy and use it for charitable estate planning, which would include gifting for charities, their community or their children or heirs.  They can also cash it out and, in our example, increase their income from $700/month to $1,000/month plus depending on whether there's any cash value in this policy. 

At this point, you might wonder why this important to you and why you should care. The reason is that you, like all other US citizens with the exception of some federal employees, are currently the owner of one of the largest single life only pensions available. It may never have been described this way, but essentially what I'm describing to you is your Social Security benefit.

Hundreds of thousands of people retiring every year factor Social Security into their retirement income. However, for married couples, if one of them pre-deceases the surviving spouse, they must forfeit the lesser of the two Social Security checks.

So, in our example, let’s assume John is receiving $1,000/month from Social Security and Abby is receiving $800/month. If John pre-deceases Abby, then Abby continues to get the larger of the two checks ($1,000/month in this scenario), but then she forfeits the lesser of the two checks, which would be $800/month.
Unless Abby’s living costs have also reduced by that $800/month, or she has been saving those dollars, when the larger of the two Social Security check recipients dies, the surviving spouse, in this case Abby, is going to be woefully short on her income needs.

Often in retirement planning, we hear the old industry joke that life insurance is only for women. When someone says that they mean that, traditionally, couples are around the same age and that men usually have a shorter life span. I always joke with our clients that the men always die first1.

Why does this matter? What this means is that the majority of surviving spouses are women and we need to ensure they are taken care of and able to bridge this economic shortfall by using life insurance.  

From a personal perspective, in my own practice, we have 68 widows, 63 of whom are women and only 5 are men. Based on those odds, the chances are that most women will survive their spouses and not have enough income. That is why life insurance is such an important tool for true financial security.

Retirement planning is a complicated process and one of the reasons it is so important is because it allows you to provide for your loved ones after you’ve passed on. For help planning your retirement, contact us today.

"Why Do Women Live Longer Than Men?" Time; August 6, 2008.,8599,1827162,00.html 

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