One of the biggest retirement decisions people make doesn’t involve the stock market at all. It’s a choice hidden inside their pension paperwork.

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Transcript: 

Speaker 1  00:00

Hey, time once again, to plan with the tax man, and we are going to talk about the biggest retirement decisions people make that doesn't involve the stock market or could make, right? So it's a choice hidden inside the pension paperwork. Let's get into it. Would you trade $600 a month to protect your spouse? Look up in the sky. It's a bird. It's a plane.

Speaker 2  00:21

No, it's the tax man. He may not be a superhero, but Tony Morrow has saved many retirement plans with his extreme knowledge of tax planning strategies. It's time for plan with the tax man.

Speaker 1  00:34

Welcome into the podcast, folks. This is another edition of plan with the tax man, with Tony Morrow from tax doctor. Inc, and you can find them [email protected] and again, yourplanningpros.com and Tony, this week, we've got a listener question, a variation. Anyway, I'll change it up just a little bit. And you've been getting some of these lately yourself as well. And so we want to talk about this, the pension trade off conversation. And so we'll, I'll just set it up. Let me read the email and then, and then we'll dive into it. All right, okay, all right. So with my pension, the person says I can get $3,500 a month, but the wife gets nothing when I die, or I can take 2900 a month and she'll continue to get all of it after I'm gone. As always, I'm wondering which is better and Tony. It seems cut and dried, like the spouse is sitting there, probably listening, going, duh, take the one where I get money after you die. But let's, at least, for the sake of the conversation, talk about, you know, the pros and cons of both ways. And I think that's what people need to think about when this situation comes up, right? It's not Yes, probably 80% of the time, it probably does make sense to take the spousal continuation, but maybe not always. So let's discuss it. How you doing?

Tony Mauro  01:47

I'm doing good. I've been doing good since first year. So getting ready to dwell into tax season. And we do get this question a lot. And you know what I find with tax clients is I find more of the clients that I've talked to, they actually take the higher amount not knowing. They don't read over their paperwork. Very, very well true. And you know, so I find that, you know, make sure you're before you even dwell into this read this paperwork, make sure you understand before you check boxes. And make sure that you get some advice you have any questions on it, yeah, because one can, you know, really devastate you if you pick the wrong one, but you're, you know, in this case, and this is a topic of mine, because as I get a little closer to the end, my wife has worked for the government for it'll be probably 47 years, but she goes, Oh, wow. And so we'll have this choice in our public retirement plan called IPERs, and, you know, so yeah, me, as a spouse, I'm just like you said, you know, let's take the lower amount, because I want to make sure you know that if something happens to you, that I've got this till I die, right? But the nice part about IPERs, in our case in Iowa, is, if I go first and we're at the lower amount, she can actually bump herself back up to the higher amount. Oh, it's rained or her life. So, yeah, you know, that works. But what a lot of people need to take a look at in this and make some decisions and talk to their advisors about is, you know, the very first thing is, what kind of longevity does the covered person, meaning the you know, person that's going to get this benefit, have within their lifetime? And you know, use that, you know, to make this decision, because obviously, you know, the higher payout shifts the risk to the surviving spouse, correct, and you know that that's kind of a risk. And so that's why we kind of titled this, you know, is this reduction or this $600 a month worth it? Because it does act like a little bit of insurance, you know,

Speaker 1  03:38

if, yeah, for sure, it's like a little insurance policy and that. And I guess we can skip around a little bit, because that really it's easy for us to walk to that conversation piece, because that's what a lot of people tend to think. They go, Well, why don't I take the bigger amount, the 3500 in this example, and invest that $600 difference, and I'll buy my own life insurance, right? And so that's certainly something that people think, and I in their statistics that show I can probably do better and leave some tax free money, because it'll be in a tax in a life insurance policy. And that's fine, that's totally possible, but you need to run the math first and see, and to your point about longevity, that's going to play into that. Because if you don't really have longevity on your side, and you go that route, you may not live long enough to fund that policy exactly. You may not live long enough, and you may not be healthy enough at 6570, they're even going to issue a policy another, I don't think, you know, 600 a month may not buy you a whole lot at that time, because you might, you know, hey, if you can get the policy, it's gonna be well more than that pending.

Tony Mauro  04:35

And, you know, you may not be even insurable. So again, conversation to have, but that is a that's an option, which is why you want to have these conversations, you know, which I think is good

Speaker 1  04:47

well, so you think about, Okay, a couple of different things, right? So let's just go with the standard statistics. Male passes first, the females right behind, typically goes, guys pass away first. So a couple things happen, right? So this, this the shift you talked about, the risk. Shifts to the spouse? Well, a couple of things big, big things happen right off the bat. One is you're going to higher tax bracket. You weren't expecting that, right? So you've got that. You're going to lose one social security, so you're going to go to the higher one. So if you don't have this spousal option checked in on, can you survive the lower income hit right? Depending on what your other assets and the other things you have in place. So talk a little bit about some of those things and how you've seen that. So again, this is it's case by case specific.

Tony Mauro  05:26

Case by case specific. Is exactly it, because you hit all the topics and it needs to be discussed. Because if you have the assets where none of that you just mentioned, it matters, and you still gonna have plenty of income and everything, well then maybe the higher amount, you know, is a better option for you, but more times than not, in our case, exactly what you said happens, expenses don't drop, income drops, and now all of a sudden you've got higher taxes, more you know, same expenses, less income. And you know, then you've underestimated the impact of all this, and by taking that higher amount, you still may not have enough to cover things, and then all of a sudden the whole retirement plan shifts and changes on you. And, you know, do you really want that? You know? And so that's why I think it needs to be discussed. Yeah.

Speaker 1  06:14

And there's a lot of little pieces to that, right? So there's those different pieces. And I think sometimes Tony people kind of fall into that factor of, well, they've heard it forever. Well, they're only going to need half the money coming in when one of us dies anyway, right? So, so we're good any if, even if we did take the bigger amount, because we've got plenty. But half is a misnomer. It's, it's not, it's more like 85% I

Tony Mauro  06:36

think it's, yeah, at least that. I don't. People always say that to me. I said I've never seen it happen. Expenses don't drop to half. Everybody that I've I've worked with, I haven't seen one yet at best, yeah, they dropped 10 to 15. I had one case dropped about 20, but not half. And luckily, in his case, everything else he had, it didn't really matter too much, because he was pretty well off. I mean, he had not only social security, but he had a big pension of his own and a big portfolio, you know, things like that. But I think all those other things you need to have the discussion to figure out where this fits in the rest of your overall plan, right? I mean, with everything else, because that's going to really guide you on what to take, well, you know, or which way to

Speaker 1  07:19

go, yeah, yeah, for sure. Well, how the pension fits in with the rest of the overall plan, right? I mean, that's really going to be a big key. So this is where, again, why not stress test the situation? If this is on your radar, if you're eligible for our pension, right? If you've got somebody in the in the family that's going to possibly be getting one, go sit down with somebody and say, let's look at the different options. Because Tony, just like Social Security, you well, actually, even worse than Social Security, they typically don't come with colas, and there's no do over there's

Tony Mauro  07:45

no do over on this, no. And I think a lot of us, as you get into retirement, I mean, for me personally, I like to, what I value is, I want to make sure that my and my wife's income, you know, it's monthly income, is the way I look at it, is not is going to be the same regardless of who dies first, and the remaining person can be here and have the same income coming in, you know, if one of us is gone. Now, I mean, yes, we've got the nest egg over here that's funding that income, and then Social Security and some other things. But to me that I want more certainty than, you know, a little bit higher monthly amount? Yeah, I mean that, like, say that's just me and for us, you know, I'm gonna assume I'm gonna die first, and if she can go back and get the higher benefit that for her rest of her days, my decisions made already, because, you know, we'll take the lower amount. And if she ends up living me 10 years, well, then she'll she can go back and get that higher amount for all those 10 years, which I think

Speaker 1  08:39

is good. And Tony, what if you already have, like, life insurance in place, right? So again, running these numbers because maybe it makes sense to take the higher amount because you don't need it. You've ran the portfolio, you've ran the Social Security maximizations, you've ran all these things, and you guys are going to be sitting pretty without taking the spousal option. Then fine, right? I mean, what else could you do with it? Right? Can you could spend it, I guess, however you want, while the initial person is here, yeah, and depending, life insurance is a big part of it. Now, what I find in reality,

Tony Mauro  09:11

most clients, generally don't have the life insurance. Toward the end, they usually have all this term, and it starts to run out about 65 you know. So they're past their their bill paying years and debts, and so they don't have it. But if you do, and have some big permanent policy, you know, say you're out there with, you know, 2, $3 million worth, total of permanent life that you can't outlive, meaning that as long as you pay the premiums, they're going to pay out somebody, and if that goes to the spouse when you kick off early, then you know, you could take that $3 million invest it, and probably, you know, get your 3500 a month. So, yeah, it makes some sense to take a look at

Speaker 1  09:47

that as well. Yeah, so we're talking peace of mind versus maximum income. I guess

Tony Mauro  09:51

I think at the end of the day, that's really what it is, is peace of mind, knowing that the living spouse is still going to have something I know again I keep talking to. Out my own situation, but I know, in my wife's case, you know, her hyper is going to be fairly large now. I mean, you know, if something happened to her and we took the wrong and we took the one where it ends when she dies, I'm going to be okay, but, boy, I could be a heck of a lot better, you know, if I continued to get that until, until I died, yeah, but yeah, it for me, it's peace of mind over a little bit bigger benefit. I actually had an uncle. He has now passed where he wasn't he chose the wrong one. He didn't even know he did it. And then it happens. That happens a lot, doesn't it? It happens a lot. He went back and tried to fight him on it, saying, oh, you know, no, you got to give me the one that covers my spouse. And they legally, they would not do it. And he lost that case and and then it ended when he died, which is about two years ago, a spouse still living, and he's got nothing. She got no benefit from that. So real life, real life decisions, and it does happen,

Speaker 1  10:53

yeah, for sure. Well, look, neither choice is wrong, but it does need to align with the overall values and the reality of whatever your financial situation is this decision is about deciding what kind of protection matters most in your retirement strategy, right? So you got to understand the trade off so that you can find the right answer, right? And I think that's where people make to your point about the uncle, you know, if this is something on the radar, make sure, before you elect or ignore that you run a complete, you know, breakdown and scenario to see what's going to be beneficial. Because I'm quite sure, if you go with the title that we used here, Tony for this episode, would you trade $600 a month to protect your spouse? Your spouse is probably looking at you, going, you're better. Yeah, that's right. So no matter which side it goes, whether it's male, female, whatever, but make sure that you're covering your loved one, but again, do the right thing too, because you could find it could be a better solution to go the other way, but you don't know till you run that math right. Any final

Tony Mauro  11:49

thoughts, my friend, no, I would say, as I generally do, this is an important, important decision. And make sure, especially retirees, you know, they're not sure when they read this paperwork. Get advice. You know, if you don't have an advisor, ask one of your children, but, but get with an advisor or somebody before you check the wrong box,

Speaker 1  12:07

yeah, and then make a big mistake. So indeed, well, good stuff, good conversation. And again, topical this month with our chats, because Tony's been getting questions about both of the podcasts we dropped this month. And as always, to you know, learn more, stay abreast of things, or just, you know, get some of the information you need, subscribe to the podcast, or at least, consider it, maybe share it with others who might benefit from the message as well. You can find plan with the tax man on all the major podcasting apps. All you got to do is type that into the search box, plan with the tax man, or just go to Tony's website. Your planning pros.com that's your planning pros.com lots of good tools, tips and resources there as well. Get some time on the calendar and all that good stuff. So Tony, thanks for breaking it down and being with us. We always appreciate your time, and we will see you next time here on plan with the tax man,

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