Ask The Hammer – Pension Choices

Key Takeaways

• Evaluate pension options as a household decision: Determine how important it is to provide ongoing income for your spouse, what other assets/income sources you have together, and whether your spouse could return to work or maintain their standard of living if you passed away early
• Don't assume expenses drop 50% when one spouse dies: Fixed costs like utilities, property taxes, and insurance remain similar, and groceries for one person don't cost half as much as for two—meaning a surviving spouse typically needs 70-80% of the prior household income
• Consider the 'pension max' strategy if you want maximum income: Take the highest pension payment (Option 1) and use a portion to purchase life insurance; if you live a normal lifespan, your spouse receives more total income, and if you die early, the insurance payout protects them
• Account for spousal life expectancy and the 'widow's penalty': Women typically live 3-4 years longer than spouses and face higher tax rates as single filers versus married couples, which can significantly reduce surviving spouse income even with the same dollars
• Prioritize your goals first, then optimize: Start by determining whether spousal income security is critical or whether you can afford to gamble on your own longevity for higher current payments—base this decision on health factors, not just mathematics