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Dear Fix My Portfolio,
My wife and I got married in 2023. I am 58 and she is 55. I am retiring in June 2025 at 59 and I am getting three pensions. I am already getting one, which is $1,000 a month before taxes.
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For the other two, we have to decide whether it’s worth taking the survivor’s benefit option, which would reduce the monthly payment, or just leave the pension to pay out for my entire life, which would mean a higher monthly payment but would end when I die. If I add her to the benefit, she would receive 50% of the lower amount of each of those two pensions in the event of my death. One is worth $4,500 a month at full benefit and would start when I retire, and the other is $1,450 a month but doesn’t start until I’m 67.
Instead of taking the survivors benefit, we are considering taking out a $1 million life insurance policy on me, with my wife as beneficiary, to replace the lost pensions if I were to die before her. The cost of that insurance is about $700 a month. I am wondering when I should start taking Social Security as well.
Pension Quester
Dear Quester,
This is a simple math question that many couples face in retirement, especially if the main breadwinner is older.
The cautionary tale I have for you comes from my high school days. I had a teacher who was faced with this decision when he retired and opted for the higher pension amount with no survivorship for his wife. Then he had a heart attack and died three months after he stopped teaching, leaving her with no income security.
He hasn’t thought about the move you’re considering, adding life insurance to replace retirement income. It’s smart to think of this as an either/or proposition. The spouse who earns the least, who often has a longer life expectancy, needs protection against the other spouse’s loss of income. Whatever you do, make sure you have one or the other. And while you’re at it, think of Social Security in the same way, because it’s also a kind of retirement plan with a survival option for you.
This is where the math comes in, because the choice you make is simply the option that gives you the most value for your money.
“The question is, can they replace the survival option with insurance?” said Natalie Karp, an independent insurance broker in New York who often deals with this situation. When clients present her with this dilemma, she has an equation to help them make the decision.
In your case, you want to first calculate the difference between the $5,950 of the two combined pensions and what your wife would get at 50% of the reduced pension amount with the survivor option. That becomes your limit, so to speak.
“Basically, if the cost of the life insurance is greater than the difference, then the analysis fails. She should keep the survivor options,” Karp said. If the cost of the insurance is less than the difference, then that’s the route you’d want to go.
Long term plans
But there’s more to it than that. You don’t want to just buy a $1 million life insurance policy and not have it work for you to replace the income you’re missing out on. That $1 million policy you priced might not even be the right amount to fill the income gap you’re trying to fill.
Let’s say the gap is $2,500 a month. Karp suggested that $1 million might be more than you need. “You might only need $500,000. That would allow you to buy a 20-year term policy,” she said. You could also combine that with a guaranteed universal life insurance policy to cover the possibility that the older spouse outlives the term, and even add long-term care insurance — “if you want to be a little fancy,” Karp said.
If the retiree dies and the younger spouse gets the life insurance payout, which is tax-free, Karp suggests rolling it into a lump-sum immediate annuity (SPIA), which would set up an income stream for life on the amount the spouse would expect from the pension. That’s the important final step that would replicate the pension survivorship advantage.
“Boom, there’s your magic,” Karp said. “You want to use that $500,000 death benefit to create an income stream.”
If that seems like a lot of work, it is. If you’re doing this alone, it might be easier to just take the survivor benefit and know it’s guaranteed. But if you can work with a professional you trust, who has access to all the policy information, and who works with these types of scenarios regularly, you can make the math work in your favor.
Incidentally, Social Security works in a similar way. A strategy that many couples use when the lower-earning spouse is younger is for that spouse to file a claim when he or she turns 62, while the older, higher-earning spouse waits to claim until he or she reaches the maximum retirement age of 70. At that point, the younger spouse can claim a spousal benefit, if it is higher than his or her own. If the older spouse dies first, the younger spouse would receive that higher benefit as his or her own, if they are both of full retirement age by that time.
Whatever you do, think about all your options, taking into account all the variables at your disposal. The decision you make must be accurate.
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