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"Pension Issue Emphasizes Need to Plan"
by
12-19-2001
Question: At 62, I am being “offered” an opportunity to leave my employment with a large company where I have worked for the past 34 years. As part of the package, I have the option of choosing a pension option so that, should I die first, my wife will receive 60 percent of the amount I was receiving for her life. We have talked to a financial planner and an accountant, each of whom gave us different advice. My wife has never worked outside the home. What is your suggestion?
Answer: The death of a spouse has significant effects upon the survivor, both emotionally and economically. In addition to deep sadness, the survivor almost always suffers a loss of income. For example, a surviving spouse will receive the greater of an award based upon his or her work record or 100 percent of the deceased spouse’s record, but not both. And similarly, those who receive distributions from private pension plans may suffer a loss of income depending on the type of annuity plan and survivor benefit chosen. For example, those who chose two-life annuities (which are calculated to pay a reduced amount to the employee-spouse during his or her life and then a percentage of that amount until the death of the second spouse) will not lose as much income upon the death of a spouse, but there will be less money available during the life of the employee-spouse.
And, without planning, the death of a spouse can reduce assets because of the expense of the final illness. For example, even with Medicare, the surviving spouse will have to pay some out of pocket expenses, not to mention the cost of the funeral. If the deceased spouse was a victim of chronic illness, the cost of uninsured long-term care may seriously deplete the couple’s financial resources. And if the couple relied on Medicaid to help pay the expenses of the deceased spouse, many times most of the couple’s assets were used to pay the medical expenses and long-term care costs of the deceased spouse before they became financially eligible for Medicaid.
As a result, surviving spouses often have substantially fewer assets and less income for their support than the couple had planned for. Faced with diminished financial resources, many surviving spouses must reevaluate their housing and other economic needs in order to live more frugally.
Taking The NextStep: The decision of whether to opt for a survivor annuity depends on your overall plan. Some who do not choose the survivor annuity take a portion of the difference in benefits to purchase a life insurance policy so that, should the employee-spouse die first, a pool of tax-free money will be available for the survivor. The problem here, however, is that if the family gets into financial difficulties or faces uninsured long-term care, there is not enough money to fund the life insurance which, in some instances, is allowed to lapse. That’s why planning should begin for later life long before retirement -- preferably while we are still in our fifties. The planning should include long-term care insurance and, where appropriate, purchases of life insurance while the premiums are less expensive.
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