We’ve been talking about the 25 different areas of your life where you seldom ever have all these micro-advisors in the same room, at the same time. Today, I am focusing on a very specific benefit that only applies to very few people. In addition, I will be sharing a failure from my past.
Today’s discussion is “pensions”. The example above may represent factory work or possibly a municipality, or maybe it’s a staff member at a school, but what it shows is that these people often have the option for a future pension from their employer. At some point in time, because of the years that have been put in, dollars will be flowing out to the retired employee because of the time that they spent within that organization.
Pensions used to be a bigger part of retirement planning. If you are a teacher, factory worker, or governmental employee, it still likely is. Typically, once a certain amount of time has been put in, you are given the option of a pension. A pension will come with many decisions that you will have to make. As you review these future elections, will you be taking an amount that could be higher for now, but will prevent your spouse from ever receiving a benefit upon your death? Will you receive a lower amount, but then upon your death, your spouse will be able to continue life with part of the pension that you had built up during your years of employment? What percentage would that be?
If you are a person who does not have a pension, can you create a pension? Many people don’t realize that the pension amount that is payable monthly does not come directly from your employer. Your employer has enlisted a company that will manage the money to pay it out to you monthly, oftentimes for the remainder of your life, no matter how long you live. For a person who has the resources, but wants certainty instead of the ups and downs of the market and the fear of running out of money, they can go to a company and create their own pension.
This is typically a life insurance company because they already work with actuarial tables. They know how long a certain group of people, male or female, typically will live. You can then take some of your assets, go to this third party, and create a lifetime income that is guaranteed by the insurance company that you will never run out of monthly payments. With a “self-created” pension, the insurance company is betting you will die early and you are betting you’re going to die later. This is the opposite of how life insurance works, where you plan in case you live an unexpectedly shorter life, and the insurance company is hoping that you are going to live for a long time.
You’re faced with a lot of big decisions when it comes to a pension. When do you take it? Do you accelerate it, if that’s an option? What percentage would you leave to a spouse?
Here is a moment that I have to admit my own, personal failure. About two years into my career, before I even had a hint of gray hair, I met with a gentleman who was retiring from a local manufacturing company. It was time for him to make his pension elections. He had already decided the amount that he was going to take. This amount was based upon his “single life”. It was going to pay him the most amount of money possible, but it was based on his life only, which would mean that his spouse would not receive anything after his death. She would only get the continuation of his Social Security because she had never worked outside of the home.
I remember the conversation because she said, “Oh, I need to sign a form so that “Bob” (not his real name) can receive his pension.” What she didn’t realize and what I did not vocalize is that she would not receive any benefits upon his death. He wanted the most amount of money possible, which is exactly what he got. I can remember him being overweight, in bad physical shape, and not in good health. As somebody who was then in their 20s (me), I can remember thinking to myself, I hope she dies first, but I knew how the actuarial math works. I never knew what ever happened to that couple.
Here is why I failed. I failed because I did not get ‘in their face’. I did not tell her what her decision could cost her if he died before she did. Maybe I didn’t ask enough questions. Maybe I didn’t have the maturity. Maybe I didn’t have the experience. But here’s the deal, I do now. Sometimes people don’t necessarily like to hear what I have to say to them, but now I have earned the right to sometimes be in someone’s face and point out the possible mistakes in their thinking. I make it very black and white, no matter how they may feel about me at the end of the conversation. At the end of the day, I have to live the life of a ‘principled’ individual.
When you are discussing the ins and outs of a pension, and if that discussion entails a conversation with me, I can assure you that I will try my best to provide a full understanding of what the options are and how they may play out in your life. Most of the time with a pension, there is no do-over. What you elect is what you are stuck with forever.
