Tuesday, March 01, 2005

Asset Preservation 101: Maxing your Pension & Leaving More Behind for Your Heirs

Most pension options stink. I know that in New York City (most plans are controlled by NYCERS or NYSNA), city workers get a very limited pair of benefit distribution options come time to retire and start collecting. Did you know that if you choose to "max" your pension (Option 1), your payments will cease after your passing? If you have a spouse or child, you will probably settle for Option 2--joint and survivor--which allows you to pass the benefit to your spouse, but NOT without drastically reducing the dollar ammount each of you will receive. In some cases, federal law mandates that you take this option. As an example, a city nurse with 30 years of service could see up to $13,000 taken away from her if she decides to leave pension benefits to his or her beneficiary. As you see, almost by default, most people have to go with option 2 even though the sound of losing retirement income is anything but pretty.

But what if there was a way to recover that lost money?

The solution is Pension Maximization--which is where you take option 1 while taking out a permanent insurance policy, earmarking that for the lost benefit. This way, you take the most from the pension while you are alive (which is what you deserve after working so damn hard) AS WELL AS make your money strech 2 generations when you're no longer around. Unlike the current pension system in NYC--which allows you to leave money for only ONE beneficiary (if you have kids, you're out of luck b/c only your spouse will receive the pension income stream, payments ceasing altogether after he passes)--the insurance trust you set up will leave money behind for spouse, children, and grandchildren. You need the trust because it is the best way to bypass disputes among your heirs and pinpoint how your assets will get distributed (a will isn't enough). For instance, a city worker who has seperated has to legally divorce him or her; otherwise, the ex-spouse has legal right to your pension money! Alternatively, what if you happen to pass away prematurely and your widow remarries--who is to say he won't pass along pension money to her, tragically leaving your kids/estate out of the equation.

Pension Max is affordable. That's because the premiums are paid during your working years with money you would've lost anyway (the $13,000). The trick is to make sure your premiums never exceed that theoretically lost money. Pay it off while your still working and when you DO sit back and retire, you can rest comfortably knowing that your estate plans have been secured. City employees should NOT let the choice be made for them by a bloated pension structure.

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