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Defined Benefit Retirement Plans

Pension Maximization Worksheet (This information is available in pamphlet form from Utah Retirement Systems.)

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Two tests must be satisfied to make pension maximization taken at retirement work:

  1. Your net lifetime pension, after paying insurance premiums, must be greater than had you chosen a survivor option.
  2. The insurance proceeds must buy your spouse a lifetime income at least equal to a survivor pension.

You and the agent should fill in the following worksheet to see if the proposal meets both tests: (See note 1)

1. Your monthly retirement benefit if paid for your life only (Plan 1) $______________
2. Your monthly benefit after all taxes. (See note 2) $______________
3. Your monthly benefit if you take a survivor option (Plans 3 through 6) $______________
4. That same benefit after all taxes. (See note 2) $______________
5. Your spouse's monthly benefit after you die if you take a survivor option (100% or 50% of line 3) $______________
6. This same benefit after all taxes. (See note 2) $______________
7. Midpoint between lines 5 and 6. This is a target for how much insurance you'd need under pension max. (See note 3) (Plans 3-6 increase by up to 4% annually on the original benefit.) $______________
8. The cost of buying your spouse an annuity after you die, based on her/his age when you retire. (See note 3) This annuity rate shows how much monthly income your spouse can buy for every $1,000 of insurance proceeds. Age:_________ Annuity Rate: $___________ $______________
9. The life insurance proceeds needed to provide the monthly income. To calculate this, divide the target income (line 7) by the annuity rate (on line 8) and multiply by 1000. $______________
10. Monthly life insurance premium required to secure the proceeds above. $______________
11. Subtract the monthly premium (line 10) from the after-tax income you'd get from a Plan 1 benefit (line 2). This is the disposable income that you as a couple would have left to live on. $______________

If your income after pension max (line 11) is less than your plan 3-6 income (line 4), stop here, it doesn't work. If pension max provides you with more income as a couple, continue the calculation to see if it protects your spouse.

12. Your spouse's life expectancy (See note 4) based on line 8. Use figure from Life Expectancy Table below. $______________
13. The portion of your spouse's annuity income (line 7) that will be excluded from income taxes. This is called the Exclusion Ratio. (See note 5) Carry it to three decimal places. 0._____________
14. Subtract the Exclusion Ration from 1.000. 0._____________
15. Enter the monthly income you targeted from line 7. $______________
16. Multiply line 15 by line 14. This is the taxable portion of your spouse's annuity income. $______________
17. Subtract income taxes (See note 2) from your spouse's annuity income, and enter that income after tax. $______________
18. Enter the actual amount of net spousal income you need to cover with insurance (line 6). $______________
If line 18 is larger than line 17, you need more insurance.
If line 18 is less than line 17, you could buy a smaller policy.

Due to space, this worksheet does not consider the effect of your 4% cost-of-living adjustment (COLA). Nevertheless, you can estimate your future pension and with this form determine if life insurance will supply a comparable benefit for your spouse:

  • Multiply your original retirement benefit by 4% (.04).
  • Multiply that figure by the years you're comparing (5, 10, etc., minus one year).
  • Add the result to your original benefit.

This is your estimated future benefit. Your spouse's 100% continuing benefit will carry an annual COLA the same as yours; a 50% continuing benefit will carry an annual COLA half of yours.

Finally, have your agent do a present value analysis. This recognizes that $1 spent on insurance premiums today is worth more than $1 in future benefits and reveals whether they are worth the cost. Don't buy from anyone who won't (or can't) do this calculation for you. Always get a present value analysis for insurance with COLA features or where premiums or death benefits vary.

Notes:

  1. This worksheet is not effective for plans started earlier than retirement. For such plans, the salesperson should compare the cost of the insurance premium with the after-tax pension benefits expected, adjusting for the fact that the costs come now and the benefits later.

  2. Federal, state, and local. Do the exact calculation. Don't just estimate 15, 28, or 33 percent. Use correct marital status when calculating.

  3. Your agent or financial planner will be able to target this exactly.

  4. For safety, refigure for five, ten and twenty years ahead. Each year the spouse lives, his or her life expectancy improves.

  5. To get this ratio: multiply the spouse's monthly annuity income (line 7 or actual) by 12. Multiply the result by the Life Expectancy (line 12); divide the result into the proceeds of the life-insurance policy.
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Worksheet prepared by John Allen JD, Allen-Warren, PO Box 74035, Arvada, CO 80006.

Life Expectancy Table

A person
this age		 Can expect
to live
this many
more years		 A person
this age		 Can expect
to live
this many
more years		 A person
this age		 Can expect
to live
this many
more years
20 61.9 42 40.6 64 20.8
21 60.9 43 39.6 65 20.0
22 59.9 44 38.7 66 19.2
23 59.9 45 37.7 67 18.4
24 58.9 46 36.8 68 17.6
25 57.9 47 35.9 69 16.8
26 56.0 48 34.9 70 16.0
27 55.1 49 34.0 71 15.3
28 54.1 50 33.1 72 14.6
29 53.1 51 32.2 73 13.9
30 52.2 52 31.3 74 13.2
31 51.2 53 30.4 75 12.5
32 50.2 54 29.5 76 11.9
33 49.3 55 28.6 77 11.2
34 48.3 56 27.7 78 10.6
35 47.3 57 26.8 79 10.0
36 46.4 58 25.9 80 9.5
37 45.4 59 25.0 81 8.9
38 44.4 60 24.2 82 8.4
39 43.5 61 23.3 83 7.9
40 42.5 62 22.5 84 7.4
41 41.5 63 21.6 85 6.9

 

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