Trading a Pension for the House? Think Carefully!

A traditional pension, as opposed to a retirement account such as a 401(k) or an IRA, provides a life-time income stream to the employee, based upon a combination of his or her years of service and salary. Without a pension, the major problem you face is outliving your money. And this is especially true today when people are living longer than ever.

During the past 18 years I have seen couples trade “the house for the pension” more times than I can count. And my concern, which I almost always voice, is, “If you waive your right to a pension, how will you manage when it comes time to retire?” Unfortunately, the response is often, “I’ll figure that out when I get there.”

This is a major concern for a spouse who has not funded another retirement account, believing that he or she could rely on his or her spouse’s pension, and it is an even greater concern if that spouse has only been in the workforce for a short time, because his or her Social Security benefit will usually substantially be reduced.

While it might not be the best long-term choice to waive a future benefit (the pension) for a present one (the house), I can certainly understand why someone would want to do so.

First of all, a spouse may want to keep the house intact for the benefit of the children of the marriage, but may not have the cash to buy the other out.

Second, the “non-working” spouse may feel that he or she is not entitled to share in the pension that his or her spouse “worked” for all those years. And this is even more likely to be the case when the “non-working” spouse is the one who initiated the idea of ending the marriage.

While I am all about self-determination, I do want to make sure my mediation clients are considering the long-term consequences of their decisions. While figuring it out later may be their reaction today, I do not feel I am serving them properly if I do not at least point out my concerns, and try to explore other options that might be available to them short of waiving a future benefit.

But if they insist on exchanging the short-term benefit of keeping the house for the future benefit of having a pension available to them when they are ready to retire, I at least want to inform them of a financial product that might help them resolve this when that time comes. In my next post I will discuss how an annuity might be a useful device to address this need.