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Frequently Asked Questions (FAQ)
Questions:
- What future trends should pre-retirees and their financial advisors be aware of?
- What is Pension Concepts, LLC role in retirement planning?
- What are some of the traditional “retirement options” found in traditional pension?
- Is the “Pop-Up Option” common and what does it mean?
- Would Pension Concepts recommend the “Pop-Up Option”?
- Why do the majority of married couples settle for a reduced income?
- Is the “Pension Dilemma” like Pension Maximization (PenMaxx)?
- What is misunderstood about PenMaxx?
- Why should any pre-retiree consider PenMaxx?
- Is additional income the reason why pre-retirees should consider PenMaxx?
- Is this decision understood by most retirees?
- Can the employer be of assistance in this decision?
- What role do financial advisors have?
- What is the ideal age to begin this type of planning?
- Under what circumstances is PenMaxx not a solution?
- Who would be the ideal candidate for this planning?
- How can this planning encompass other areas?
- What final advice would you give a financial advisor?
Answers:
1. What future trends should pre-retirees and their financial advisors be aware of? Pre-retirees are retiring younger, that means more years relying on their savings, social security, and pension income. While at the same time, life expectancy in the United States is improving.
2. What is Pension Concepts, LLC. role in retirement planning? Pension Concepts, for over 20 years, has been researching pension plans for pre-retiree clients of financial advisors . Financial advisors complete our fact finder on their pre-retiring clients, including a signature, authorizing Pension Concepts to contact their retirement department. Pension Concepts can then provide complete and accurate alternatives.
3. What are some of the traditional “retirement options” found in traditional pension? Healthy pre-retirees should always consider taking the Single Life option and purchasing life insurance because if they take the reduced benefit they’re paying a premium anyway. Defined Benefit plans vary in the option choices they offer; Single Life, Straight Life with Refund of Account Balance, 50% Joint & Survivor (J&S), 100% J&S, 66.7% J&S, 10 Year Period Certain and Life, 20 Year Period Certain and Life, to name a few. Defined Contributions plans can have, in addition to a possible lump sum rollover, the same choice of purchasing annuities as mentioned above.
4. Is the “Pop-Up Option” common and what does it mean? You are correct. The “Pop-up” feature is likely to be found where pensions are taxpayer based, more so than in private sector plans. “Pop-up”, “Restore”, “Bounce back”, some of the names for this feature, means that if the retiree’s beneficiary dies first they can cancel the J&S cost and return to the Single Life. It’s interesting to me that pension plans have come up with this feature that can already exist under a Pension Maximization approach. An advantage with Pension Maximization is; the values in your life insurance policy could be surrendered or the death benefit could be designated to another beneficiary. Also if the pop-up is offered by the pension plan there may be an additional cost if it’s actuarially sound.
5. Would Pension Concepts recommend the “Pop-Up Option”? With proper planning, pre-retirees would not be subjected to possible additional costs or the consequences of not recovering the reduction in income they have lost until the pop-up would be in effect. With the Pension Maximization approach, they will be on Single Life with a life insurance death benefit for their beneficiary.
6. Why do the majority of married couples settle for a reduced income? Healthy pre-retiree’s should always look closely at the J&S option. Simply ask these questions. 1) What happens if my beneficiary dies first? Example; Pension Concepts has encountered many retirees taking a J&S for their spouse who is in poor health. 2) What has the cost been, and what benefit was gained, if the retiree lives a normal life expectancy? Example; retiree age 60, lives to age 80 and dies. How many more years of income from the pension could their 80-year-old spouse expect to receive? According to Tax Facts Table 1, a Female age 80 has 9.6 years life expectancy; a Male age 80 has 7.5 years life expectancy. In this example, the retiring couple had 20 years of a reduced pension income to give a Female spouse a benefit for 9.6 more years or a Male spouse 7.5 more years. 3) What would the retiree’s children, grandchildren, heirs, estate, or charity receive when they both die from the pension options? Hint zero!!
7. Is the “Pension Dilemma” like Pension Maximization (PenMaxx)? Pension Maximization has been referred to by various terms: Pen-Max, Pension Dilemma, The Alternative, Pension Trap, etc.
8. What is misunderstood about PenMaxx? Pension Maximization has been a concept for over 40 years. The most often misunderstood aspect of this whole concept, and some “expert” financial advisors miss entirely, is the underwriting process. The insurance company underwriting process has proven very reliable over hundreds of years. If the insurance company accepts the life insurance risk, the pre-retiree can be assured, the underwriter felt their life expectancy was longer than average. Pension Concepts is amazed at how that knowledge, as critical as it is, is often ignored. How can any one predict the order of death? The J&S assumes the retire dies first and if that isn’t the case the J&S doesn’t work at all.
9. Why should any pre-retiree consider PenMaxx? It’s quite simple; if they don’t consider life insurance and take the Single Life they are paying a cost (premium) anyway. Once the J&S reduction is elected all control over that reduction has vanished. There are no surrender values, estate planning and charitable giving capabilities also vanish and you may not be able to rename a new beneficiary.
10. Is additional income the reason why pre-retirees should consider PenMaxx? Let me be clear, it may not increase in all cases their after tax income, on a month-to-month basis. However over a lifetime when taxes, present value of money, cash value and beneficiary control is considered, Pension Maximization can be an attractive alternative.
11. Is this decision understood by most retirees? No, we see little understanding of the deeper issues, especially the cost over a person’s life expectancy. The election of a pension J&S option, if viewed with only the cost of the first month considered, can be misleading . Pension Concepts has heard and we quote “it’s only $300 per month”, but failed to realize thats $3,600 in the first year, $36,000 in 10 years and $72,000 in 20 years, not including any post-retirement cost-of-living a pension could grant.
12. Can the employer be of assistance in this decision? Pension Concepts feels the responsibility of the benefits department is to provide accurate information, option amounts, health insurance information, and related subjects pertaining to retirement. Benefit departments should be in a fiduciary capacity. The planning process of taxation, insurance, or financial advice should come from the clients financial advisors.
13. What role do financial advisors have? should get involved with their clients who are going to have this decision to make. The sooner pre-retirees look at this situation the better. Pension Concepts has found that people age 50 and over are most interested. With college expenses slowing down, the mortgage payments coming to an end and becoming an “empty nester”, discretionary dollars maybe available.
14. What is the ideal age to begin this type of planning? As I've stated before, the sooner the better. Insurance can serve many roles prior to retirement, mortgage cancellation, education funding, premature death of the income earner, cash values for emergencies, insurability, etc. Exploring pre-retirement issues early can benefit in other areas of financial planning.
15. Under what circumstances is PenMaxx not a solution? Pension Concepts has found that the pre-retiree who is rated or a tobacco user may not have access to cost-effective underwriting. In this situation, the pre-retiree may want to look into the advantages and disadvantages of converting their group term coverage offered by their employer. The pre-retiree who is single or has no dependents may have no need for Pension Maximization.
16. Who would be the ideal candidate for this planning? Healthy pre-retirees, retiring from qualified pension plans, who are considering taking a reduced option from their pension to provide for a beneficiary when they die.
17. How can this planning encompass other areas? Once pre-retirees realize they are going to experience the cost of the J&S they may consider donating their J&S cost to charity. The charitable trust could be the applicant, owner, premium payer and beneficiary of a policy that pays an income to the beneficiary at the retiree’s death. Income from the insurance proceeds is then paid to the beneficiary till their death; any funds remaining can be used by the charity.
18. What final advice would you give a financial advisor? First and foremost get good, accurate research on the retirement benefits. Are the benefits projected, vested, earned to date payable at a normal retirement date, etc? There are thousand’s of plans with many nuances to be familiar with. The proposal Pension Concepts provides is thoroughly researched and considers after tax and present value which enables true "apples to apples" evaluation.
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