Protecting Your Spouse's Income: The Importance of Choosing the Right Pension Option

When it comes to retirement planning, one of the most critical decisions you'll make is choosing between a single-life and joint-and-survivor pension option. While the single-life option may seem more appealing at first glance, it's essential to consider the potential consequences for your spouse's financial well-being. In this article, we'll explore the importance of choosing the right pension option and how three ETFs can help you create a survivor cushion.

The Joint-and-Survivor Option: A Lifetime Insurance Policy for Your Spouse

Under federal pension law, married participants in a qualified plan are defaulted into a joint-and-survivor annuity. This option pays a reduced monthly benefit to your spouse for the rest of their life, providing a lifetime income stream. The joint-and-survivor version of the pension is essentially a lifetime insurance policy for your spouse, and it's essential to treat the reduction in monthly benefits as the premium on this policy.

The Single-Life Option: A Higher Monthly Benefit, but at What Cost?

The single-life option pays a higher monthly benefit, but it ends the day you die. This means that your spouse will lose the income stream they would have received under the joint-and-survivor option. While the single-life option may seem more appealing at first glance, it's essential to consider the potential consequences for your spouse's financial well-being.

The Pension Maximization Strategy: A Risky Proposition

Some financial advisors may recommend the pension maximization strategy, which involves taking the single-life payout and using it to buy term life insurance to cover the gap. However, this strategy relies on several assumptions that may not hold true in reality. For example, you must stay insurable, the insurer must honor the policy for decades, and the surviving spouse must invest the death benefit effectively. If any of these assumptions fail, the widow or widower may be left stranded.

Supplementing Your Pension with ETFs

While the joint-and-survivor option is still the best form of insurance you can buy, there are three ETFs that can help you create a survivor cushion to supplement your pension. These ETFs are: * SPHD (Invesco S&P 500 High Dividend Low Volatility ETF): This ETF holds the highest-yielding, lowest-volatility names in the S&P 500 and pays every month. Recent distributions have been $0.21963 per share, with a trailing twelve-month payout of $2.4435. * GOVT (iShares U.S. Treasury Bond ETF): This ETF owns U.S. Treasuries across the curve, from short bills to long bonds, with roughly $41 billion in net assets. It pays monthly, with recent distributions climbing with rates. * RDVY (First Trust Rising Dividend Achievers ETF): This ETF screens for U.S. companies with rising dividends, strong cash, and manageable payout ratios, then rebalances annually. Recent top positions include Applied Materials, Lam Research, and KLA, alongside insurers and banks such as Allstate, Chubb, and JPMorgan. These ETFs can provide a steady income stream to help your spouse bridge the gap between the joint-and-survivor pension and their own retirement savings. However, it's essential to remember that these ETFs are not a replacement for the joint-and-survivor option, but rather a supplement to help create a survivor cushion.

Conclusion

Choosing the right pension option is a critical decision that can have a significant impact on your spouse's financial well-being. While the single-life option may seem more appealing at first glance, it's essential to consider the potential consequences for your spouse's income stream. By supplementing your pension with ETFs, you can create a survivor cushion to help your spouse bridge the gap between the joint-and-survivor pension and their own retirement savings.