07 Aug Pension benefit payouts for spouses

 Q. I‘m ready to take my pension and I have to decide on a benefit for me only or one that continues for my wife after I die. We’re both 65. How do we decide?

A. There are several different items to consider when making this decision.

Of course, if we knew how many more years each of you will be around, it would make for an easy conversation, said Jim Sonneborn, a certified financial planner with RegentAtlantic Capital in Morristown.

Sonneborn said pension plans will typically offer a choice between a single life benefit for the worker or one which has varying percentage survivorship payments should the worker die before their spouse.

“The single life option would provide the worker the highest monthly benefit during their lifetime, but nothing for their surviving spouse,” he said. “Alternatively, a benefit with survivorship payments will be lower during the worker’s lifetime, but can provide continued cash flow to the spouse.”

These survivorship benefits may range from 25 percent of the worker’s payment to as much as 100 percent. The higher the survivorship benefit as a percentage, the lower the worker’s payments during their life, he said.

According to Social Security, life expectancy for two spouses who are both 65 indicates that the woman typically will outlive their husband by several years, Sonneborn said. If you each live exactly to your life expectancy, the cumulative pension benefit should be equal regardless of the option chosen. If you were to die a bit earlier or she lives a bit longer than the actuarial tables assume, it would be better for your wife to have a survivor benefit on your pension, he said.

Sonneborn said it’s important to consider the health situation for each of you and as well the family genetics for longevity.

“If one of you has a serious health issue and may not make it to their life expectancy, that should be taken into consideration,” Sonneborn said. “Do the women in the family tend to outlive the men by a large margin? This would strongly suggest a high survivorship payment option.”

Also, in your absence, you need to determine if your wife need some portion of the pension benefit to maintain her desired lifestyle.

Sonneborn sets this scene: Let’s say you chose the single life with no survivor benefit option. The day after the payments start, you get hit by a bus. Will your wife be okay without that pension benefit? Would there be regret for missing out on the expected years of payments? If we assume this worst case scenario, what level of survivor benefits would be needed?

Generally, it can make sense to choose an option with a survivor benefit as insurance against your early demise, Sonneborn said.

“There certainly is a cost to this insurance in the form of your lower benefit, but that cost can provide significant peace of mind to you both,” Sonneborn said. “The survivor percentage payment choice is quite individual, balancing the need for cash flow during your life with that your spouse will need after you are gone.”

He said that for his clients, he’s found that a higher percentage, such as 66 2/3 percent or 75 percent survivor payments, tends to strike a good balance.

Finally, be sure to consider the different benefit options within the context of your overall financial plan, including your other sources of retirement income and your investments.

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This story was first posted in August 2015.