Should I give my spouse a survivor benefit when I apply for my pension?

moneyThis is the third post about three important retirement-age questions: When should I apply for Medicare?  When should I start drawing Social Security retirement benefits?  Should I give my spouse a survivor benefit when I apply for my pension?

A married retiree usually has an option to give a survivor benefit to his or her spouse when applying for a pension.  In exchange for a smaller monthly payment, the pension plan agrees that when the retiree dies, the plan will pay a benefit to a surviving spouse.  Depending on how much the retiree’s benefit is reduced, the surviving spouse might get a quarter, a half, or a larger portion of the retiree’s benefit.

Some retirees might only look at the immediate benefit.  They say, “I can get $1,200.00 or $1,500.00; that’s a no-brainer, I’ll take $1,500.00.”  Unfortunately, that is a literally a no-brain response.  However, according to Uccello and Goldwyn, “Single Life vs. Joint and Survivor Pension Payout Options: How Do Married Retirees Choose?” (The Urban Institute, 2003), most retirees and spouses engage in more robust analysis.  The spouse has a vital interest in this decision, particularly if the spouse is female and younger than her husband.  She would be highly likely to survive her husband by many years.

In a typical one-wage-earner household, the wage earner has almost all the income after retirement.  When the wage earner dies, the surviving spouse may be left with insufficient income to maintain his or her lifestyle.

Let’s assume that Herman and Hennie are retiring.  Herman’s Social Security will be $1,500.00 per month and Hennie will receive $750.00 per month as the spouse of a wage earner.  The spouse of a wage earner receives a Social Security benefit that is half of the wage earner’s, unless the spouse’s benefit on her own account is higher.  After a spouse’s death, the surviving spouse receives the higher of the deceased spouse’s benefit and the surviving spouse’s own amount.

Herman is also eligible for a $1,500.00 pension.  Unless Herman and Hennie elect a survivor benefit on Herman’s pension, after he dies Hennie’s only income will be Herman’s Social Security benefit.  From combined income of $3,750.00 pre-mortem, her income will drop to $1,500.00.

The benefit difference between a retiree-only benefit and a joint-and-survivor benefit will probably be small compared to the potential benefit for the surviving spouse, particularly if they are close in age.  Assume that the difference between a retiree-only pension and joint-and-survivor benefit giving Hennie a 50% survivor benefit is 10%.  For $150 per month, Herman is buying a $750 per month benefit for Hennie, if she survives him.

The decision whether to elect a survivor benefit may be complex, depending the age and health of each spouse, and whether each spouse has his or her own retirement income based on employment.  Other options, such as using life insurance instead of a survivor benefit on the pension should be explored.  The objective should be long-range financial security for both spouses.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
©2014 John B. Payne, Attorney

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