Making the Most of Your Pension: A Smarter Way to Retire

Retirement is a major milestone, and making the right decisions about your income can significantly impact your financial future. Retirees who still have a pension are faced with an important choice: take the highest possible pension payout or choose a reduced survivorship amount that guarantees financial security for their spouse. What many people don’t realize is that there’s a third option—Pension Maximization—which allows them to get the best of both worlds.

Pension Maximization is a strategy that helps retirees maximize their income while ensuring their spouse is financially protected. Instead of selecting the reduced pension option that provides a survivor benefit, retirees can choose the highest pension payout and essentially purchase life insurance to protect their spouse in case of their passing. This way, they can enjoy more income during their retirement years while still providing for their loved ones.

Many married retirees choose the survivor pension option because it seems like the safest way to ensure their spouse’s financial security. In some cases, this is true—it provides a guaranteed continuation of income. However, this option comes with significant downsides. Choosing a survivor pension permanently reduces the retiree’s monthly income for life. Additionally, it lacks flexibility; if the spouse passes away first, the pension remains reduced, and typically no one else benefits from it.

The third downside of the survivor option is often overlooked. It does not build any equity. The difference between the maximum pension and the survivor pension can be seen as the “cost” of securing a death benefit—similar to paying life insurance premiums. However, unlike life insurance, these monthly reductions accumulate over time without the possibility of a refund or payout to heirs. It’s money lost to the pension. If the surviving spouse never collects, and both spouses pass away, the pension simply stops, leaving nothing behind for children or other beneficiaries – no matter how much they expected to receive throughout their retirement.

By choosing Pension Maximization and utilizing life insurance instead, retirees can maintain full control of their financial future. They receive a higher pension while securing a financial safety net for their spouse. Additionally, if their spouse passes away first, the retiree can either keep the insurance for their own protection or pass the benefits down to their children, or charity.

An example of this strategy in action is Rose, a public school employee, now age 65 & married, who retired in 2024. She had the option of receiving either a $5,000 per month maximum pension or a reduced $4,000 per month survivor pension that would continue for her husband if she passed away first. Instead of taking the lower amount, Rose chose the higher pension and funded an Overfunded Whole Life Insurance Policy with a $700,000 death benefit with a Long-Term Care Insurance Rider. She funded $18,000 per year in her policy for 10 years, securing financial protection for her husband while also maximizing her retirement income. If her husband passed away before her, she could either cash out the policy, leave the benefits to her children and grandchildren, or use it to protect against a long-term care event.

Remember the often-overlooked downside of the survivor option? The cost. What cost?  Let’s say Rose lives 25 years in retirement, earns 4%/year, & takes the payout of $1000 less per month?  The math is a bit shocking: Her total survivor option “cost” would have been $499,750.90. The pension would have kept that. Now her family can collect it.

When considering Pension Maximization, it’s important to choose the right type of permanent life insurance. You might consider Universal Life, Traditional Whole Life, or Overfunded Whole Life. Each have their strengths. Overfunded Whole Life is less known but is exactly what it sounds like. It’s a specially designed whole life policy that is premium front loaded to offer a potentially higher death benefit and cash value over time, making it an ideal choice for those who can afford to contribute more.

This strategy is not available nor suitable for everyone.  One would need to be medically insurable, have the means to afford a policy, and 5-10+ years prior to retirement.  Work with an agent that is a specialist in pension maximization and offers all three insurance options.

For retirees who want to make the most of their pension while maintaining flexibility and protecting their family’s future, Pension Maximization can be a game-changer. Rather than settling for a reduced pension and limited options, this strategy provides greater financial freedom and long-term security. A pension can be one of the most valuable assets a person will ever have, it’s worth exploring every possible way to maximize its benefits.