Friday, August 31, 2012

Don’t Sign on the Dotted Line of Your Spouse’s Plan

Signing off on your spouse’s pension options without fully understanding them could cost you thousands or even millions of dollars over your lifetime.

There are many pensions in trouble today due to underfunding of their liabilities; and it has become exceedingly more common to offer employees a lump sum option. The other option is a lifetime income benefit.

Let’s look at two scenarios. We will start with a lifetime income option. John and Ellen were married for 25 years when John was offered an early retirement. John worked in the pension department of a Fortune 500 company. When he told Ellen they were going to take the single life option because it offered the highest payout, she signed off on the decision without a thought. His reasoning was that they were in their 50s and needed more income now in case he decided not to go back to work. She assumed that because he dealt with this in his job he would “do the right thing.” Whether this was a malicious decision or he thought it didn’t matter, he was later diagnosed with a terminal illness and Ellen was faced with the reality of losing $50,000 per year in income at his death. It was too late to buy insurance because he was now uninsurable. What was the cost to Ellen’s future? Assuming an interest rate of 4.25% and a life expectancy of 25 years, she lost the equivalent of $760,000 by not reviewing all the options.

All pensions are required to offer some type of survivor benefits, and they will always be a reduced amount because it is covering two lives instead of one.

More importantly, it is an IRREVOCABLE decision.

That means, it can’t be changed. I have spoken with a friend who currently works in a pension department and he said it is not uncommon for this to happen even today, when non-employee spouses are required by law to sign off if they waive the survivor benefit. “I didn’t understand” or “he didn’t explain the consequences,” are not excuses and you will not win a lawsuit and have the decision changed.

The moral of this story – this is your financial future and though it may be “ours” today, death and divorce happen. Insist on getting a second option before making a potentially life altering decision.

In the next blog, I will discuss the lump sum option.

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