Pension Maximization Using Whole Life Insurance

Today, we’re gonna talk about pension maximization for government employees who have a defined benefit pension promised to them, usually a function of their salary. So this is for teachers, cops, firemen, postmasters, FBI agents.

We’ve worked with all of the above, and the pensions all work about the same. This happens to be one of my favorite clients right here. This is my lovely wife, Jessica, and she, has a pension promised to her by State Teachers Retirement System here in California. And this is a screenshot from their calculator.

We just entered in some rough numbers, and, we were trying to get to just a a round number that everybody could relate to. But it basically says if she works for thirty years and she retires at age sixty in two months and her average salary is seven grand, then she’ll be promised five thousand dollars per month for the rest of her life by taking in all these factors here. The only problem when you take this, what’s called an unmodified, or option one or the maximum benefit, is if she were to pass away in retirement, then her survivor, me, and her kids would get nothing. All of this would just go away.

And most people don’t take that option when being fiscally conservative. What happens is they get to retirement, and usually they don’t do any planning around this until the eleventh hour. And then when they go to set up the retirement meeting, they’re given a couple options, sometimes a few options. We’re just gonna discuss the two most common options, and you guys could probably all relate to this.

What this says is, you know, I don’t necessarily need, the full five thousand because I wanna make sure, my husband gets something. We’re both counting on my retirement. So what if I want him to get everything I get? So if you if she wanted me to get a hundred percent of her pension, instead of getting five thousand, she get forty two seventy one.

And if she were to pass away, then I would continue to get the forty two seventy one for the rest of my life. And then when I passed away, it would be gone. There would be nothing left. So that’s what happens when you check this box.

Sometimes people say, you know, gosh, that’s a big reduction. Five thousand to forty two seventy one. What if I just reduce it a little bit? Then instead of getting forty six seventy five or excuse me, instead of getting five thousand, she would get forty six seventy five.

And if she were to die, then I would get fifty percent of forty six seventy five, which is twenty three thirty seven for the rest of my life. And then if I were to pass away, those benefits would stop. And I often ask my clients, so, you know, even though they call it modified options, one hundred percent option, fifty percent option, option one, option two, option three, joint life and survivorship, whatever they call it, it doesn’t matter. If you went out into the free market and you paid an institution money or you had an institution withhold money from your check that you’re entitled to, to promise somebody else money when you die, What’s that called?

And the answer is life insurance.

So this is not a traditional life insurance policy, but for all practical purposes, this is life insurance. And you could even say that, you know, here you have about a seven hundred and twenty nine dollar monthly premium. And here you have a three hundred and twenty five dollar monthly premium to make sure that somebody else gets some kind of money after you die. And what’s almost always more financially efficient is to acquire your own permanent life insurance that doesn’t go away while you’re younger and healthier so that this is paid up in retirement.

And you can say, you know what? I’m gonna pass on these benefits, and I would like my full monthly pension of five thousand a month knowing that if this was set up properly, there’d be plenty of tax free money to either replace this full option or at least cause you to take a lower reduction.

So you can check the best best box for your family. So just assuming for a second that the numbers can work out to be substantially better than choosing one of the options that will be provided you by your pension provider, which is almost always the case when somebody can qualify for insurance. I also wanna talk about another qualitative benefit, with the fact that there’s only four possible things that can happen in terms of the sequence and timing of both Jessica and I dying. I know it’s a morbid subject, but only one of these four possible things could happen. Either Jessica and I live a good long life in retirement, I possibly die early in retirement and Jessica lives a good long life.

Both of us die early in retirement or Jessica dies early in retirement. And obviously, we’re choosing the pension option to protect against this last one. But by doing so, she’s putting our family in a worse off position than these three. And I’ll explain why now. So we already talked about that, we would get seven hundred and twenty nine dollars less per month.

And if we just times that by twenty five years, it’s over two hundred and eighteen thousand dollars. And that’s not even taking to account that she would normally get a cost of living adjustment, a COLA, on her pension benefits. So it could potentially be even more than that.

So if we both live a long time and she reduces her pension, well, we didn’t really need to do that. And if I were to die early, this depends on the pension provider. But a lot of times, they don’t give Jessica a raise. So they lock her in to the lower payment, the lower pension payment. And she’s not even getting a benefit anymore.

Some of the pension providers don’t do this, but it’s definitely something worth looking at. If that were the case, this would obviously be a bad decision. And then this works for all the pension providers. If both of us die, there’s no death benefit, for our kids or charities we care about or whatever else.

Obviously, the reason why we’re doing this is to make sure that I continue to get money. So we’ll just say this is a tie. We always design these whole life policies to provide at least the same amount of benefit that if Jessica were to die on day one. So let’s just look what would happen if we had our own life insurance in place and we took the maximum option.

Well, if we have our own life insurance here, then we get to take the full pension. That’s seven hundred and twenty nine dollars a month guaranteed plus the COLA cost of living adjustment.

Plus, you can take a supplement from your life insurance policy. So what this means is every year that goes by that Jessica doesn’t die, we need less death benefit to support the same amount of income because I won’t need it as long because we’re getting older. So we could start to bleed down the cash value of our life insurance, which will correspondingly lower the death benefit, but we could take this extra supplement. And this supplement is tax free, and that’s a huge advantage, especially since all these government pensions will be fully taxable when you take them.

Let’s say that I die early. Well, now Jessica has a lot of cash value inside her policies inside her policy that she could take as income, as extra income, or she could leave the death benefit to our kids. And it’s not an either or conversation. She could do some of each.

She can choose and toggle as she goes how much cash value she wants to take while alive and how much death benefit she wants to leave to our kids, which brings us to this, sad outcome. If we both died early, remember with the pension, our kids don’t get anything. All that money we’ve been saving, all that pension we were counting on, that’s just gone. That’s just absorbed right back into the pension system.

But if we have our own life insurance, insurance, the full death benefit will actually go to our kids or whoever we list as beneficiaries, and we can change that while we’re the owner of the policy.

And then last, the thing we are trying to protect about in the first place, again, if Jessica were to pass away just day one, we’re gonna structure the policy to have enough death benefit to create that extra five thousand dollars of income for me on an ongoing basis so that it it’s almost like we checked the box where we had to reduce our pension to, forty two seventy nine, I think it was.

So a lot of you were saying, yeah, this is great, Hutch. I love it. The only problem is I don’t have any money to fund something like this. We looked at, whole life insurance and, you know, it’s just too expensive, so we have some term right now.

And plus, we’re saving in five twenty nine plans and TSAs and four fifty sevens and four zero three bs or whatever it is to supplement our retirement. And so we just don’t have any money for this. And what I would say is, well, wait a second. So if you recall, she could take the full pension or she could reduce her retirement.

And you’re saving all this money in four fifty sevens TSA, so you have extra money in retirement.

Well, you really have one foot on the gas and one foot on the brake. And so the next video is going to discuss how to maybe redeploy some of these funds, these supplemental retirement funds towards a program like this so you can increase your pension on a guaranteed basis.