Data Entry

The data entry for Pension Max occurs on the top of the Pension Max screen. Each item is discussed below:

Pension Max data Entry

Primary Option

This is the option that the client will take in place of the alternative option. It will have a higher income than the options shown in the Overview of Various Options grid (below).

Why would an illustration be run against an option different than the primary option?

1.It replaces a smaller income difference, therefore requiring less life insurance; it also costs less to fund.

2.The spouse may still receive benefits from the retirement system (such as health insurance).

Option to be Replaced

Select the option to show the desired detailed analysis in the calculation pages.

Payout Method

This pertains to how the life insurance money is paid when the client passes away. The options are Annuitize and Interest Bearing.

Annuity Rate

If the client opts to annuitize the funds, enter the annuity rate. To determine the rate to use:

1.Contact the insurance company with whom you are placing the policy.

2.Ask them for the rate of their 10 year/life annuity.

3.To be conservative, consider reducing their 10 year/life annuity rate by 15% to 20%.

Reserve Fund Rate

This is the interest rate on the reserve fund.

Understanding the Function of the Reserve Fund

The purpose of the reserve fund must be understood to determine what rate of return will be used. It is used slightly different, depending upon the payout method of the life insurance proceeds. Each is explained below.

Interest Bearing

If an interest bearing payment is chosen, the life insurance proceeds are deposited into the "reserve fund", earning at the entered interest rate. Payments from the account may be increased each year to match the retirement plan's COLA.


If the client opts to annuitize the money, the reserve fund plays a key role.

Many defined benefit plans have an annual cost of living adjustment (COLA). This COLA must be duplicated when the money from the life insurance is paid out to determine the life insurance needed.

Annuities typically do not include a COLA. If the account is annuitized, the reserve fund acts as an investment fund so that the income from the annuity and reserve fund will match the pension plan proceeds, including any COLA included in the pension plan. In other words, the reserve fund makes up the difference between the ever increasing pension plan benefit and the level annuity payment.

Additionally, the reserve fund balance at the spouse's life expectancy can act as a buffer if the spouse out-live's their life expectancy.

This calculation can be performed one of two ways:

1.Over-funding the annuity. In the early years the income of the annuity will have a greater after-tax income than the pension plan. This income is deposited in to the "Reserve Fund". Then, in later years, distribution can occur from the reserve fund investment to make up the shortfall in income because of the pension plan's COLA.

2.Excess life insurance. Not all of the distributions from the life insurance will be annuitized. Rather, a part of the life insurance proceeds are deposited into the "reserve fund". This balance will grow to the desired value at the spouse's life expectancy

TRAK will calculate both methods and use the method with the lower life insurance required.

In either case, (Interest Bearing or Annuitize) the interest rate on the reserve fund should be conservative. The higher the reserve fund rate of return, the less insurance is needed; but, higher investment results come with increased risk.

Reserve Fund's Final Balance

This is the balance of the reserve fund at the spouse's life expectancy. This allows for the reserve fund to still have a balance at the spouse's life expectancy--the retirement fund would continue to pay past life expectancy.

Why should the reserve fund have a final account balance?

The final account balance is the amount of money the client will theoretically have in their account at the end of their spouse's life expectancy. It provides a cushion if the spouse lives past their life expectancy; i.e. the money does not run out. The larger the amount the client wants to have available, the more insurance it will take.

Tax Bracket

Enter the marginal tax bracket that will be used to illustrate during the years the spouse is the survivor.

Some issues to keep in mind:

It may seem like a good idea to invest the proceeds rather than annuitize them. If, however, the individual lives past normal life expectancy, they will be out of money.

The investment return is not guaranteed. If the investment does not perform as expected, the client might not have enough money to last to life expectancy.