Weighing Your Family Continuation Options Before Drawing A Pension

Employees who will be receiving a pension at retirement have a difficult decision to make about how to pass their pension to heirs. Most pension recipients don’t realize they should be planning for this important selection years before they retire. The selection of the “Spousal Continuation Program” can have an immense impact on their retirement income for years to come.

A pension is a retirement system you pay into while working in order to get a monthly paycheck when you retire. The participant pays into the pension plan while working, which pays for current retirees, and when they enter retirement the people working will pay in to the system for them. Social security is usually defined by income and quarters paid into the system, the pension is usually defined by an equation which takes into account how long the client worked and what age they retire. Based on those two factors a worker can get a percentage of their paycheck in retirement. Pensions are private plans funded by state or private organizations with a limited number of employees versus social security which is a mandated federal system for all employees. Pensions are not as common these days as they are mostly reserved for governmental employees such as teachers, firefighters, police officers, court workers, and other various government agencies. For those who do receive a pension they must make an important selection at retirement to continue their pension on to family if they were to pass away.

Issues can arise when clients retire and they are faced with a decision of taking a member only benefit of their calculation or taking a reduced spousal continuation option benefit. The spousal continuation option is a reduced monthly benefit to ensure if the member were to pass away their spouse would continue to receive the monthly benefit. This option will decrease the pension members monthly income while they are living to ensure their spouse receives a paycheck in the event of their passing.

The spousal continuation option sounds like a no brainer decision to pass money on to your spouse but can come with a heavy cost for some people. As the age between the member and their spouse increases so does the monthly cost to have a spousal continuation option. If your spouse is younger than you, they charge a higher monthly deduction to ensure the benefit goes on to your spouse. If your spouse were to pass away before you, there is no refund on the money you gave up to the system. If both spouses pass away together, there is no monthly benefit can pass on to your children or heirs.

The following information was obtained via the California State Teachers Retirement System (CAL STRS) Retirement Benefit Calculator: in April 2020.

Looking at CAL STRS as an example we can review the options of a sample client. The CAL STRS pension is based on the equation of, YEARS OF SERVICE x AGE FACTOR = % OF SALARY. The sample client here is 64 years old, 35 years of service, $110000 of income, and a spouse who is 60 years old.

As an example, the client would be entitled to $7,700 per month or $92,400 annually from their Cal STRS pension for a member only benefit. Now taking into account the client’s spousal options we would see if they wanted to pass on 100% to their spouse, they would instead be paid $6,330.17 per month or $75,962.04 annually which is a decrease of 17.79% of their income. This would translate to a reduction of $1369.83 monthly income or reduction of $16,437.96 annual income from their pension. This can be a big reduction in the income clients expect in retirement.

IMPORTANT: This summary of certain information about California State Teachers Retirement System (CAL STRS), it is not an official explanation or discussion of the program. In the event of a discrepancy between any information provided here and any information provided by CAL STERS, the latter will prevail.

A common problem clients face is that they want to leave their partner secure, but also are concerned about the reduce benefit amount. Any money they forfeit in a reduced benefit, depending on longevity of their partner, would not be recouped by their heirs. The solution to pension spousal continuation is to plan before you get there. There many options to consider when planning some of which include;

  • Taking a lower spousal pension such as a 50% option so they are not giving up as much on a monthly basis.
  • They can decide to save into an investment account to help supplement their heir’s income when they pass.
  • They can take out a life insurance policy with the excess amount received in a life only payout versus spousal continuation to provide a lump sum tax free benefit to their heirs.

There are many options for each client’s situation, but the most important thing is to plan early. Seeking professional guidance will help alleviate some of the stress associated with planning and help evaluate options to select a proper strategy.


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