Choosing Your Highest Pension Income Option

If your goal is to provide the most amount of income for both you and your spouse’s life, then you will want to analyze the different income options in your pension. The option you choose is based on your life expectancy and the difference in age between you and your spouse.

There are four steps to find out which percentage will pay the most over you and your spouse’s lifetime.


Step 1) Determine the total payments that will be paid while the pension recipient is alive.


Step 2) Determine the future benefit amount at the pension recipients date of death.


Step 3) Determine the total payments that will be paid for the remainder of the spouse’s life expectancy.


Step 4) Add Step 1 and Step 3 together

Example 1:

John has a pension with the following annual income options: $24,000 Single-Life income, $20,000 50% survivor income, $18,000 75% survivor income, and $17,000 100% survivor income. John will turn on the pension when he is 65 years old and at that time, his spouse will be 60 years old. John’s life expectancy is 85 years, while his spouse’s life expectancy is 88 years. We will analyze the 50% survivor income benefit to see the total value of the payments over both of their lifetimes.

Step 1)

P = PMT x (((1 + r)^n-1) / r) -> P = $20,000 x (((1+.02)^20-1) / .02) -> P = $485,947
PMT = $20,000 (Pension Payment)
r = 2% (Cost of Living Adjustment)
n = 20 (number of years for first recipient to collect payments)

Step 2)

Future Payment = PMT x (1 + r)^n -> $20,000 x (1+.02)^20 -> $29,719 x Survivor% = $14,860

Step 3)

P = PMT x (((1 + r)^n-1) / r) -> P = ($14,860) x (((1+.02)^8-1) / .02) -> P = $127,538
PMT = $14,860 (New Pension Payment)
r = 2% (Same Cost of Living Adjustment)
n = 8 (number of years for second recipient to collect payments)

Step 4)

Add Step 3 to Step 1 -> $127,538 + $485,947 = $613,485 Total Lifetime Value of Pension

Example 2:

John has a pension with the following annual income options: $24,000 Single-Life income, $20,000 50% survivor income, $18,000 75% survivor income, and $17,000 100% survivor income. John will turn on the pension when he is 65 years old and at that time, his spouse will be 60 years old. John’s life expectancy is 85 years, while his spouse’s life expectancy is 88 years. We will analyze the 100% survivor income benefit to see the total value of the payments over both of their lifetimes.

Step 1)

P = PMT x (((1 + r)^n-1) / r) -> P = $17,000 x (((1+.02)^20-1) / .02) -> P = $413,055PMT = $17,000 (Pension Payment)
r = 2% (Cost of Living Adjustment)
n = 20 (number of years for first recipient to collect payments)

Step 2)

Future Payment = PMT x (1 + r)^n -> $17,000 x (1+.02)^20 -> $25,261 x Survivor% = $25,261

Step 3)

P = PMT x (((1 + r)^n-1) / r) -> P = ($25,261) x (((1+.02)^8-1) / .02) -> P = $216,814
PMT = $25,261 (New Pension Payment is the same because of 100% survivor benefit)
r = 2% (Same Cost of Living Adjustment)
n = 8 (number of years for second recipient to collect payments)

Step 4)

Add Step 3 to Step 1 -> $216,814 + $413,055 = $629,869 Total Lifetime Value of Pension

The second example beats the first example in terms of total lifetime value. If your goal is to provide the most income for you and your spouse’s life, the second example is advisable to choose. Do your own calculations in order to find which of your pension benefits will provide your family with the most value.


Sometimes a pension has a lump-sum option that can be rolled over into an IRA. It is helpful to take this amount and decide if you can get more income by purchasing income-producing assets outside of your pension. A good rule of thumb is to take 5% of your lump-sum amount and see if your current single-life pension income is more than 5% of your lump-sum amount. If your single-life pension income is more than 5% of the lump-sum, then you most likely have a fairly competitive income stream compared to what’s in the market place.