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Author: honda97 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76406  
Subject: Pension Maximization Question Date: 10/5/1999 12:15 PM
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I am planning to retire in about 3 months, and my 
employer offers a pension to me.  I need to determine 
if it is wise to take the Single Life Only option
where I would receive the maximum pension money. 

The alternative seems to be to take the Joint and
Survivor option that will provide a lifetime income
for my spouse of about $30,000 when I die.  The
pension difference between the 100% (Single Life)
option, and the Joint Survivor option is about
$5,000/year to me.  

My financial planner has told me to take the Single
Life option (maximum money to me) and invest that 
$5,000 in a Variable Universal Life (VUL)Policy.  He 
says that if I pay into his policy for about 12 years,
I would not have to pay anymore (policy would be paid
up), and the benefit to my wife (annuitized) should be
more than she would have received (about 30k/year) if
I choose the Joint/Survivor option.  

I am looking for help in making the decision. 

Should I buy a VUL?  

If not a VUL, what else can I do to provide my spouse
 with an income equal to that of the benefit of the
 Joint Survivor option (about 30k/year)?  

By the way, the VUL is being offered thru American
 Express (IDS). I suspect they have a high cost.  

It seems good to me that I can pay into a VUL for about 
12 years and then not have to pay more, as contrasted
to a life time of decreased benefits from my pension
if I select the Joint Survivor option. The 12 years is 
an estimate and is based on a sustained growth over the
period of time. Less growth means additional payments.

Help please......
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Author: Bobbcat Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14254 of 76406
Subject: Re: Pension Maximization Question Date: 10/5/1999 7:38 PM
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And if you predecease your wife before the 12 years is up, what will her income be?

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Author: Canth Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14321 of 76406
Subject: Re: Pension Maximization Question Date: 10/8/1999 3:01 PM
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Welcome Honda97
you asked.
I am planning to retire in about 3 months, and my
employer offers a pension to me. I need to determine
if it is wise to take the Single Life Only option
where I would receive the maximum pension money.

The alternative seems to be to take the Joint and
Survivor option that will provide a lifetime income
for my spouse of about $30,000 when I die. The
pension difference between the 100% (Single Life)
option, and the Joint Survivor option is about
$5,000/year to me.

There are several factors to look at. Like your comparative ages. And what would be a good guess as to how long the two of you will live. If your wife will be outliving you? What is the average life span of the men in your family?? How long is that from now?

What are your current finances?? If you die next year
how much money would your wife require??

You want to take a look at these numbers with your wife and decide what level of risk the two of you are happy with.

Other options you could look at would be a term life policy. and save/invest the difference.

Depending on the size of your nest egg you may want to go with the VUL, a term policy or just count on Soc Sec. and your nest egg to provide for your wife.




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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14323 of 76406
Subject: Re: Pension Maximization Question Date: 10/8/1999 4:08 PM
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I am planning to retire in about 3 months, and my
employer offers a pension to me. I need to determine
if it is wise to take the Single Life Only option
where I would receive the maximum pension money.

The alternative seems to be to take the Joint and
Survivor option that will provide a lifetime income
for my spouse of about $30,000 when I die. The
pension difference between the 100% (Single Life)
option, and the Joint Survivor option is about
$5,000/year to me.


I would need more information to be more definite, but a Lump Sum Distribution of a FMV $600,000 pension would be taxed at about 26% with 5 year averaging, and a lower percentage if it is less $s and/or if you were a participant prior to 1974. The $30,000 pension might, along with other income and SS, put you into the 28% or even 31% tax bracket for these funds. You may prefer investing your own funds versus a fixed pension income, and leaving some of it to children as a pension will stop when both you and your spouse die, or just you die on a single life option. It is worth considering, at least. Ed

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14428 of 76406
Subject: Re: Pension Maximization Question Date: 10/11/1999 10:30 PM
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"My financial planner has told me to take the Single
Life option (maximum money to me) and invest that
$5,000 in a Variable Universal Life (VUL)Policy. He
says that if I pay into his policy for about 12 years,
I would not have to pay anymore (policy would be paid
up), and the benefit to my wife (annuitized) should be
more than she would have received (about 30k/year) if
I choose the Joint/Survivor option."

What I hear is your FP is selling you a product he will make money on and it may not be the best investment for you or your wife.

I would want to know what the cost of the investment (load) is, the cost of the insurance portion, the cost of surrender and time needed before the surrender fee goes away.

I would also like to know the return history of the investment within the VUL. I would like to know if there is any guarantee that after 12 years of $5,000 invested per year that your payout would be $5,000 per year and for how long this stream of $5,000 would continue.

If I was to invest $5,000 per year, I would select an S&P 500 Index fund. Over the past, an Index fund on average will return about 12% per year and if you invest $5,000/yr, this will grow to $120,000. If your wife then draws 4% per year which is a conservative value, she would receive $4,800 without touching the principle and her draw would grow as the principle grows. If the principle grows at 12%, her 4% draw at the end of the next 12 years would be $12,100 and the principle would be $300,000.

This does not take income taxes into consideration which would not impact a VUL investment.

I doubt that your FP will be guaranteeing the return. If he is guaranteeing that your wife would definitely be assured $5,000/year after 12 years of investing $5,000, then this might be a deal that would be worth further evaluation.

BGP




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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14470 of 76406
Subject: Re: Pension Maximization Question Date: 10/12/1999 8:56 PM
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BGPenhollo:

<<<<"My financial planner has told me to take the Single Life option (maximum money to me) and invest that $5,000 in a Variable Universal Life (VUL)Policy. He says that if I pay into his policy for about 12 years,
I would not have to pay anymore (policy would be paid
up), and the benefit to my wife (annuitized) should be
more than she would have received (about 30k/year) if I choose the Joint/Survivor option.">>>>

"What I hear is your FP is selling you a product he will make money on and it may not be the best investment for you or your wife.

I would want to know what the cost of the investment (load) is, the cost of the insurance portion, the cost of surrender and time needed before the surrender fee goes away."


I agree.

"I would also like to know the return history of the investment within the VUL. I would like to know if there is any guarantee that after 12 years of $5,000 invested per year that your payout would be $5,000 per year and for how long this stream of $5,000 would continue."

I think that second sentence misses the heart of the question. The issue is not a $5,000 payout after 12 years; it is a $30,000 payout after H dies.

"If I was to invest $5,000 per year, I would select an S&P 500 Index fund. Over the past, an Index fund on average will return about 12% per year and if you invest $5,000/yr, this will grow to $120,000. If your wife then draws 4% per year which is a conservative value, she would receive $4,800 without touching the principle and her draw would grow as the principle grows. If the principle grows at 12%, her 4% draw at the end of the next 12 years would be $12,100 and the principle would be $300,000."

This analysis, IMO, misses the issue of what happens if H dies next year. Wife has $5,000 invested, no pension, and no insurance. Alternative pension choice would have assured W of $30,000 per year.

"I doubt that your FP will be guaranteeing the return."

I agree, and I think that this is a fundamental issue. On the other hand, guaranteeing the W 30k per year would have permanently reduced H's pension while alive, therefore, so long as the insurance cost never exceeds the $5,000 per year increase in H's pension, then H and W are no worse off than if they had elected to guarantee W 30k.

"If he is guaranteeing that your wife would definitely be assured $5,000/year after 12 years of investing $5,000, then this might be a deal that would be worth further evaluation."

I agree, but why this fixation on guaranteeing W 45k per year instead of the 30k per year that is forgone by selecting the higher pension for H?

The other real variable in this equation is how long H and W will each live? If lower pension is selected (guaranteeing W 30k) and W predeceases H, than choice was for nought. If higher pension is elected and H lives long enough to invest 5k, then insurance may have been less valuable than investing. If higher penison is elected and H dies first and quickly (i.e. before investing 5k per year can guarqntee 30k to W), W is SOL.

Just my $0.02. Hope this helps. Regards, JAFO

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Author: honda97 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14564 of 76406
Subject: Re: Pension Maximization Question Date: 10/15/1999 8:58 AM
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<<<<"My financial planner has told me to take the Single Life option (maximum money to me)
 and invest that $5,000 in a Variable Universal Life (VUL)Policy. He says that if I pay into his
 policy for about 12 years,  I would not have to pay anymore (policy would be paid  up), and the benefit to my wife (annuitized) should be  more than she would have received (about 30k/year) if I choose the Joint/Survivor option.">>>>

 "What I hear is your FP is selling you a product he will make money on and it may not be
 the best investment for you or your wife.

 I would want to know what the cost of the investment (load) is, the cost of the insurance  portion, the cost of surrender and time needed before the surrender fee goes away."

(honda97)
My FP has provided the cost of the VUL to me.  Yes he
makes a nice profit, 'but' this may not matter to me.
My ratationale is that at the end of about 12 years,
I am able to stop paying the premium and still have
the life insurance policy stay in force to cover MY
life.  The alternative is to stay with the company
pension, and continue with a pension loss of about 5k
a year FOREVER.  As the goal of this exercize is to
provide my wife with about 30k/year annuity at the 
least expensive outlay to me.



 "I would also like to know the return history of the investment within the VUL. I would like
 to know if there is any guarantee that after 12 years of $5,000 invested per year that your
 payout would be $5,000 per year and for how long this stream of $5,000 would continue." 


(honda97)
The investment choices within the policy are mine to
make from quite a few sub accounts available.  The
return is as good as the choices that I make.

 I think that second sentence misses the heart of the question. The issue is not a $5,000 payout
 after 12 years; it is a $30,000 payout after H dies.

 "If I was to invest $5,000 per year, I would select an S&P 500 Index fund. Over the past, an
 Index fund on average will return about 12% per year and if you invest $5,000/yr, this will
 grow to $120,000. If your wife then draws 4% per year which is a conservative value, she
 would receive $4,800 without touching the principle and her draw would grow as the
 principle grows. If the principle grows at 12%, her 4% draw at the end of the next 12 years
 would be $12,100 and the principle would be $300,000."

 This analysis, IMO, misses the issue of what happens if H dies next year. Wife has $5,000
 invested, no pension, and no insurance. Alternative pension choice would have assured W of
 $30,000 per year.

 "I doubt that your FP will be guaranteeing the return."

 I agree, and I think that this is a fundamental issue. On the other hand, guaranteeing the W 30k per
 year would have permanently reduced H's pension while alive, therefore, so long as the insurance
 cost never exceeds the $5,000 per year increase in H's pension, then H and W are no worse off
 than if they had elected to guarantee W 30k.

 "If he is guaranteeing that your wife would definitely be assured $5,000/year after 12 years
 of investing $5,000, then this might be a deal that would be worth further evaluation."

 I agree, but why this fixation on guaranteeing W 45k per year instead of the 30k per year that is
 forgone by selecting the higher pension for H?

 The other real variable in this equation is how long H and W will each live? If lower pension is
 selected (guaranteeing W 30k) and W predeceases H, than choice was for nought. If higher
 pension is elected and H lives long enough to invest 5k, then insurance may have been less
 valuable than investing. If higher penison is elected and H dies first and quickly (i.e. before
 investing 5k per year can guarqntee 30k to W), W is SOL. 


(honda97)
There is no guarentee that after 12 years, the policy
 will be paid up.  If my sub account investments do
 well than it might be possible to pay into the policy
 for fewer than 12 years.  Longer if they perform 
 poorly.

I think the equations are ok for this approach, my big
concern is wanting to know if this is a good way to
provide for my wife.  It is not as safe as the
guaranteed pension from my company, but than again,
 if after 12 years of payment, we would than have an
'extra' 5k/year.  

Still not sure of what approach to take.  Please 
continue the discussion.

  Thanks,

    Hond97


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Author: honda97 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14569 of 76406
Subject: Re: Pension Maximization Question Date: 10/15/1999 10:19 AM
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I would need more information to be more definite, but a Lump Sum Distribution of a FMV
 $600,000 pension would be taxed at about 26% with 5 year averaging, and a lower percentage if
 it is less $s and/or if you were a participant prior to 1974. The $30,000 pension might, along with
 other income and SS, put you into the 28% or even 31% tax bracket for these funds. You may
 prefer investing your own funds versus a fixed pension income, and leaving some of it to children
 as a pension will stop when both you and your spouse die, or just you die on a single life option. It
 is worth considering, at least.

Edcosoft,
I read your reply, but am unable to understand it.
I can't tell where the $600,000 pension comes from.
Is that what is behind the $30,000 Anuity payment my
wife would receive on my death?

I guess I am still unsure as to gamble on a sure
pension of 30k for my wife, (taking the joint annuitant
option) or instead use the 5K year delta (from the
single life option) and buy the VUL policy where the
projections (%10 annual growth) forecast that in 12
years, it should be paid up in full (longer if the
growth rate is less).

If the writer of the VUL policy goes bad, than my wife 
is exposed. Staying with the joint annuitant option of 
my pension has no real risk.

Also, from what I understand, when the VUL pays my
wife the lump sum, it than becomes part of the estate.
She would than have to buy an annuity that would
provide her with the $30/k yearly pension.  

If she dies first, than this policy would have some
cash value that I suppose would be available to me
probably with some penalties for early withdrawal.

I need to tell my company which option I want by mid-
November, so I still have some time to figure this all
out.  Thanks for your help...

   Honda97




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Author: royallap Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24637 of 76406
Subject: Re: Pension Maximization Question Date: 9/7/2000 11:58 AM
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I have a similar thought, but would like some comment. How about purchasing a level term life policy for say $500,000. Wouldn't that do the same thing, guarantee the income for W and still be cheaper than 5K /year??

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24641 of 76406
Subject: Re: Pension Maximization Question Date: 9/7/2000 12:31 PM
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royallap, you asked:

<< I have a similar thought, but would like some comment. How about purchasing a level term life policy for say $500,000. Wouldn't that do the same thing, guarantee the income for W and still be cheaper than 5K /year?? >>

No . . . a "permanent" insurance policy would be much more cost effective than using term and a side fund - mainly because of the tax issues and the rising cost of term premiums (the insurance needs to stay in place for a long as the retiree lives for the leverage of the death benefit). It's the tax leverage you get with the life insurance policy that makes it work well for a Pension Maximization plan.


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