How Pension and Social Security Decisions Shape Retirement
Guaranteed income sources can provide the foundation of any sound retirement income plan.
Pension and Social Security decisions can create an income floor.
But both (pension and social security decisions) are “one-way door” decisions that require careful analysis before you file or elect benefits.
We examine key retirement planning considerations, including when to claim Social Security (early, full retirement age, or age 70), how a “pension max” option compares to survivor benefits, and what happens to household cash flow when one spouse passes away.
For married couples, beneficiary elections and survivor pension options can materially affect the surviving spouse’s income, portfolio distribution rate, and overall financial stability.
Takeaways:
- Pension and Social Security decisions are often permanent, one-time decisions.
- Pension max options provide higher income but no survivor benefit.
- Survivor benefit elections reduce current income but protect the surviving spouse.
- Losing one income source can create significant pressure on investments.
- Coordinating pension elections with Social Security is essential for married couples.
How Pension and Social Security Decisions Shape Retirement – Links
Catch all our Mullooly Asset videos here
Subscribe to the Mullooly Asset YouTube Channel
Watch this episode (“How Pension and Social Security Decisions Shape Retirement”) on our YouTube Channel
How Pension and Social Security Decisions Shape Retirement – Transcript
The pillar of any retirement income plan is guaranteed income sources.
For many folks, this includes social security income.
But it could include pension income.
If you worked in the public sector, having two guaranteed income sources in retirement is great because it raises your income floor.
It puts that floor in place.
Both pension and social security decisions are what we like to refer to as a “one-way door.”
Once you go through the door, you can’t come back out. You’re locked into that choice.
So you know, with social security… should you:
- claim early,
- do you wait until full retirement age,
- do you wait until 70?
Once you make that choice, you’re locked in.
With your pension… it’s the same thing.
Once you make that choice (of pension and social security decisions), you’re locked into it for the rest of your life.
You can’t change it.
This is especially important for married couples.
Because a lot of pension plans have beneficiary choices.
So once you passes away, your spouse can receive your pension income.
You want to think through what income floor is going to work in different scenarios.
It’s never fun to think about, you know, the worst case scenario and one spouse not being here, predeceasing the other.
But you’re doing yourself a disservice if you don’t think about that – before you make your pension selection.
Most pension plans have different options you can choose from.
The most straightforward one is a “pension max.”
Which is, “I’m going to get the maximum amount for my life. And then once I pass away, there’s no benefit to…
I can’t… pass it on to a beneficiary. Once I pass away, that payment ends.”
Then there’s usually a couple different choices for a beneficiary… or surviving spouse.
You can leave them a hundred percent, 75%, 50%, 25%… each plan is different.
I’m not going to you know, drill down on any specific plan here.
But those are your general choices.
So while both spouses are alive, you know, that’s great.
You have two social security incomes coming in.
Assuming both spouses qualify for social security.
You’ll have two social security incomes coming in. And you’ll have a pension income coming in.
But let’s say, the higher earning spouse passes away.
What happens for the surviving spouse?
Well, the surviving spouse is going to get stepped up to the higher earner social security benefit.
So that’s good.
But their social security benefit is going to go away.
So there’s only going to be ONE social security benefit, that the surviving spouse is going to collect.
And if the Pension Max option was chosen… where, once you pass away, there’s nothing.
Uh, there’s no benefit for the spouse.
Then three guaranteed income sources are suddenly down to one.
(so these pension and social security decisions matter)
Just to put some numbers behind it…
Let’s say all three source of income (added up to) $10,000 per month.
Now the surviving spouse is down to one (source of income)… with just the social security benefit of, let’s say, $4,000 per month.
That’s a $6,000 per month gap.
If, again, you chose that pension max option and there’s no survivor benefit from your pension.
This could put a lot of stress on other areas of the plan.
The two other biggest areas are living expenses… and, your portfolio distribution rate.
You either have to make up the $6,000 gap from somewhere — most likely from investments.
Or, the surviving spouse is going to have to significantly decrease their cost of living.
But if a survivor benefit was chosen, let’s say the a hundred percent option, then the income floor is, let’s say, $8,000 instead of the $4,000 just on (one) social security check. Now you have two sources of income.
You get the surviving benefit from the pension for $4,000 a month, and you’re getting the $4,000 from the stepped-up social security.
So that’s only $2,000 per month.
That is, (possibly) a lot more doable than a $6,000 a month gap.
Choosing a pension option with a survivor benefit will reduce the amount you get each month.
But it will provide peace of mind for you and for your spouse — to know that they’ll continue to get that benefit, even if you’re not here.
Like most things, there’s no “one size fits all.”
You have to weigh every option.
But especially when it comes to a pension selection.
You have to weigh your choices beforehand.
That goes hand-in-hand with social security. Which we’ve done plenty of work on here.
So, you have to think about these things before you go through that one-way door.
Because once you go through, you can’t come back.
Thank you for watching “How Pension and Social Security Decisions Shape Your Retirement.”
