Skip to main content
No. of Recommendations: 1
My husband turned 65 this month and has a small pension coming to him from a previous employer where he worked for only 5 years.

We have to decide which payout option he should take. I'll post the $$ to make it clearer.

Life Only: $1121/month with no survivor benefit. (No way!)

10 Years Certain & Life Thereafter: "Somebody gets paid $1022/month for ten years". If he dies within the 10 years, I'd get that amt for the balance of those 10 yrs; however if he's still living after 10 yrs, he continues to get it for life.

Joint & 50%: This is the default choice. The benefit is $1104 per month until one of us dies, after which the surviving spouse gets half ($552) for as long as he or she lives.

Joint & 75%: Same deal, except the numbers change to $992 and $711.

Joint & 50% to Beneficiary: $999 to him for life; $499/mo to me if he goes first. (Same option at 75% with the numbers $948 & $711)

...and finally, the option we're considering:

Joint & 100% to Beneficiary: $902/month to him for life, and if I survive him, the same $902 continues for my life.

The lump sum payout of $154K is not an option he qualifies for.

I realize all of this is an actuarial bet on our expected life spans and which of us dies first. But I am interested in opinions from anyone who's had to make these choices. We are close in age and both in reasonably good health. However (and I hate to type this, but...) his family history isn't encouraging. Both his parents died of heart attacks at ages 70 and 74. His older sister died of a heart attack at 72; and his 67 y.o. brother has had at least three so far :(

The women on my side have all lived into their late 80s and one is still going strong at 92.

We look on this pension as being another $11k to $13k a year that we won't have to tap our retirement accounts for. So we're trying to decide whether to go for quantity or security?

Thanks in advance for any advice,


Jeanie
Print the post Back To Top
No. of Recommendations: 0
It might help to know what your choices are with social security - collecting now or waiting on that ?

Considering your family history, I might choose the joint & 100% to beneficiary.

rad
Print the post Back To Top
No. of Recommendations: 0
Don‘t count on the old man kicking off early just because his family did:

http://www.nytimes.com/2006/08/31/health/31age.html#

Life spans, says James W. Vaupel, who directs the Laboratory of Survival and Longevity at the Max Planck Institute for Demographic Research in Rostock, Germany, are nothing like a trait like height, which is strongly inherited.

“How tall your parents are compared to the average height explains 80 to 90 percent of how tall you are compared to the average person,” Dr. Vaupel said. But “only 3 percent of how long you live compared to the average person can be explained by how long your parents lived.”

“You really learn very little about your own life span from your parents’ life spans,” Dr. Vaupel said. “That’s what the evidence shows. Even twins, identical twins, die at different times.” On average, he said, more than 10 years apart.
Print the post Back To Top
No. of Recommendations: 0
There are so many permutations between choices that it's best to eliminate the options would would even consider. The Life Only is only useful for knowing what the un-reduced benefit would have been. I wouldn't compare the other options to it. The 10 Years Certain is almost the same as the Life Only, so I'd drop that as an option.

Can you make do with $552? If the answer is no, then we drop the Joint & 50% option and the Joint & 50% to Beneficiary option. Don't worry about DH being able to survive on $552. So, let's assume your answer to this is no. That leaves the Joint & 75%, the Joint & 75% to Beneficiary and the Joint & 100% to Beneficiary options as your only choices. The question now becomes, can you live with $711 or do you need $902? If you decide that $711 would be enough, then DH can decide if a $44 hit now is worth $237, should you go first.

Pesonally, I lean towards the Joint & 100% option, since DH is taking at most a $90 hit to ensure that DW maintains the same level of income. Odds favor that DH will go first based on family history, but with him being in good health, he can out live his family history.

Calvin
Print the post Back To Top
No. of Recommendations: 0

It might help to know what your choices are with social security - collecting now or waiting on that ?


Hmm... didn't think that might be a factor, but he is waiting until next August to take his full SS benefit at age 65+10mos. Even though he retired last December, he has substantial income to report this year from commissions earned in Q4 2006, but paid out in '07. If there is a way to delay the pension from starting until January (not sure of that) we'll do it, because he doesn't anticipate any earned income in '08.

As for me, I've decided not to wait until I'm 66 to collect SS.


Thanks for the input,


Jeanie
Print the post Back To Top
No. of Recommendations: 0
One way of analyzing the problem would be to compare things to the joint and 100% survivor option. If you took a lesser benefit for the survivor, you get a larger benefit now. Assuming you save and invest that additional benefit, what would it amount to after 5, 10, 15, or whatever years? Would that saved amount replace the reduced benefit?

In other words, how long would you have to collect the increased current benefit to make up for the reduced survivor benefit? What is the cross over point?

It's kind of like Social Security. If you can tell me exactly when you're going to die, I can tell you exactly when to start collecting your SS benefits. Unfortunately, answering the question is a bit difficult (barring an appointment with Guido for some cement overshoes <grin>).

But you can calculate a cross-over point. If you die early, one option is the better choice. If you die later, the other is the better choice. At some point in between, the optimal choice switches. Knowing where that cross over point is can help decide which option to choose.

--Peter <== who sees a spreadsheet project looming
Print the post Back To Top
No. of Recommendations: 0
Calvin, I like the way you broke this down for me.

The question now becomes, can you live with $711 or do you need $902? If you decide that $711 would be enough, then DH can decide if a $44 hit now is worth $237, should you go first.

The question isn't really about what we can or can't live with, but more about what is the least impact on guaranteed income once one of us dies.
Whoever dies first, we know for certain my Soc Sec will end (since his is the larger). If he goes first, I'd also lose his VA Disability which is about $4700/year - non-taxable - with a COLA.

By this time next year, we should have about $4600/month guaranteed income from Pension, Disability and combined Soc Sec. I'm hoping to make that $55K our core budget with minimal (ideally no) tapping into dividend and interest income from our investment accounts so that the principle can continue to grow. We keep enough of a ready cash stash to meet any unexpected needs or wants.

My concern, frankly, is that if I die first, DH will be bewildered by the money decisions, so whatever ones I can make now, the better. Am trying to teach our son about what DH should do, where to take money from first (taxable accounts before IRAs, etc.), but he's nearly as dense as DH. Fortunately, our daughter-in-law is very sharp about finances and so I'm relying on her to be the one DH can turn to before he makes any dumb decisions, like forgetting to take mandatory distributions at 70.5... and so on.

I'm beginning to see my instinct about the Joint & 100% option is the no-brainer.

Many thanks for your help,


Jeanie
Print the post Back To Top
No. of Recommendations: 0
I'm beginning to see my instinct about the Joint & 100% option is the no-brainer.

My husband's pension has a similar plethora of options and I haven't visited them lately because I've given up on the idea of him retiring in the next 5-10 years. One of the things we did toss around way back when we talked about ir was looking at the choices as insuring some income and discussing the other ways to do it.

If you find a good explanation of what to do with inherited IRAs and 401Ks, please pass it along. I've mentioned to my daughter that the kids need to take care with these but I'd like something to stick in the estate notebook.

rad
Print the post Back To Top
No. of Recommendations: 0
I ran the numbers with the assumption that you live 15 years. If your DH were to live less than 10 years, the "Joint & 100% to Beneficiary" is the best choice. However, if he were to live 10 years or more, the best option is the "Joint & 50%."

As noted, the "Joint & 100%" would be the easiest to plan around.

- zol
Print the post Back To Top
No. of Recommendations: 0
Ah yes, Peter. It's spreadsheet time :-)

In other words, how long would you have to collect the increased current benefit to make up for the reduced survivor benefit? What is the cross over point?

I recall doing that exercise for taking Social Security at age 62 vs. waiting until age 66. IIRC, the crossover point was 74. My thinking was the $55,000+ received during those 4 years could earn enough to replace the additional benefit I'd get by waiting until 66.

So... back to the calculator.


Jeanie
Print the post Back To Top
No. of Recommendations: 0
I don’t know the ”right” answer, if there is one, but there were a few things that have not been mentioned yet.

You didn’t mention if the pensions was indexed for inflation. Assuming that it isn’t then after a while the surviving spouse benefit will be worth a lot less years from now because of inflation.

If you have significant other assets and are unlikely to outlive your other savings, then the total amount of the pension that is paid over your lives is effectively just deposited to your portfolio and invested to eventually go to your estate. This means that the question isn’t really how much you get each month but how large your estate will be in different scenarios. I would make a spreadsheet that estimates this for the various options and life spans.

There is a life expectancy calculator at this link that might be of interest.

https://personal.vanguard.com/VGApp/hnw/planningeducation/retirement/PEdRetPicLongRetireContent.jsp

Greg
Print the post Back To Top
No. of Recommendations: 0
If you find a good explanation of what to do with inherited IRAs and 401Ks, please pass it along.

This is something I've been discussing with our tax guy. He has some good ideas, none of which I've quite digested yet, so am not confident enough to go on record with a coherent interpretation.

But I'll bet there are some good brains on the Tax Strategies Board who can help us both with that.


Jeanie
Print the post Back To Top
No. of Recommendations: 0
You didn’t mention if the pensions was indexed for inflation.

No, it is a fixed amount for always. No COLA.

Thanks for the calculator link. That will keep me busy until I post my next puzzler :-)


Jeanie
Print the post Back To Top
No. of Recommendations: 1
Jeanie, I don't mean to muddy the waters here, but there is an ugly thing in the world called inflation. All those options you listed will be fixed income dollars. Many, but not all, pensions have the option to take a lump sum. There is a whole school of retirement plans which say take the lump sum and set up your own pension. The advantage is simple, you can do where the dollars increase for inflation (fine print says not your personal inflations, but the CPI). The disadvantage is the dollars per month are significantly less. Assuming someone will be alive for 30 years or maybe more, you can look at annual withdraws in the 3.8 to 4.0% range with COLAs -- fine print exists.

As an example of inflation's effect, for 15 years, 2% inflation will cut $1,000 to $743 and 3% to $633.

The same numbers for 30 years look are: $544 and $401

Gordon
Atlanta
Print the post Back To Top
No. of Recommendations: 1
“How tall your parents are compared to the average height explains 80 to 90 percent of how tall you are compared to the average person,” Dr. Vaupel said. But “only 3 percent of how long you live compared to the average person can be explained by how long your parents lived.”

Crap. I knew it was the mailman.

IF
Print the post Back To Top
No. of Recommendations: 0
It sounds to me like you're largely answering your own question. It sounds to me like you would prefer the security of one payment that neither of you could ever outlive. If taking about $100 per month less is worth it to you as an "insurance policy" against losing the pension should one of you pass away, then so be it.

For what it's worth, when my dad retired in 1992 (at 57), he chose the 100% survivor option as well, which turned out to be a good choice as he passed away a couple years ago at age 70. Without the continued monthly pension check, my mom would probably be digging pretty hard into her savings and investments to live on.

#29
Print the post Back To Top
No. of Recommendations: 0
Many, but not all, pensions have the option to take a lump sum. There is a whole school of retirement plans which say take the lump sum and set up your own pension.

Thanks, Gordon. I agree with you and that would've been our first choice, but as I noted in my OP, it is not an option for him.

Apparently there is a fairly recent law which prohibits a certain class of employee from taking a lump sum payout. It governs those who are considered "highly compensated" and was enacted to prevent the raiding of pension funds by top executives bailing out of companies that were going under or whose pension funds were in trouble. Not the case with this particular company (their pension fund is over-funded), but since DH fell into that prohibitive class during those 5 years, they have to deny him this option.


Jeanie
Print the post Back To Top
No. of Recommendations: 0
>> Apparently there is a fairly recent law which prohibits a certain class of employee from taking a lump sum payout. It governs those who are considered "highly compensated" and was enacted to prevent the raiding of pension funds by top executives bailing out of companies that were going under or whose pension funds were in trouble. Not the case with this particular company (their pension fund is over-funded), but since DH fell into that prohibitive class during those 5 years, they have to deny him this option. <<

It will be interesting to see whether I'm eventually "bought out" of the puny pension I accrued a few years ago. I worked for one employer from 1987 to 1999, and earned a pension which (for 100% joint/survivor) would be about $260 a month at age 55 (in 2020) or $630 a month at age 65 (in 2030). I guess they don't want to buy me out until I'm just about eligible to take it, though, since there's a chance I could die before then and they'd owe us nothing.

It isn't much anyway. I'd estimate the present value at only about $20,000 if that.

I suspect I may get a letter around 2019, though, offering a buyout. Assuming I'm still alive. :-)

#29
Print the post Back To Top
No. of Recommendations: 1
I think you're wong on the joints. He gets the full amount as long as he is alive. But if he dies, the survivor (you) get the designated percentage (50% or whatever). Of course, if it's joint&100%, then it does work the way you said.

Are you certain of your numbers? Every time I've looked, the 10 yr cetain was more than joint&50%. What you posted was that it was *less*.

It depends on the situation. The problem with the joints is that when you (the spouse) die--even if it's only 1 day after the pension starts--the reduction is permanent. So instead of him getting $1121 for his livetime, he'll only get $902 (assuming the joint & 100%). Of course, if he dies first, then you continue to get the $902. What you are essentially going is paying $219/month (1121-902) (for as long as EITHER of you is still alive) for a deferred annuity paying $902/mo on yourself. Does this sound like a good deal to you?

The standard better way is to take the life-only amount (1121) but put the difference on a life insurance policy on him that would convert into an annuity for you (paying 902/mo) when he dies. Question is--does that cost more than the differnce (219) or less?
Note that if you die first, he can just cancel the policy and keep collecting the 1121 but not pay out the 219.

What I did for myself was take 10 years certain. I figure that by the time 10+ years have elapsed that our investmens will have grown so much that they will be able to supply my wife with at least the amount that the joint pension was.
Print the post Back To Top
No. of Recommendations: 0
Many thanks for your help,

You're welcome Jeanie.

I figured it would be a secondary source of income and you could live with or without it, but once a source of income starts, any change can have a major impact on budgets.

My concern, frankly, is that if I die first, DH will be bewildered by the money decisions, so whatever ones I can make now, the better. Am trying to teach our son about what DH should do, where to take money from first (taxable accounts before IRAs, etc.), but he's nearly as dense as DH.

This statement points toward the Joint & 75% or 100% to Beneficiary options. It keeps DH with the same income stream. You just have to decide if a smaller income stream would create a burden on you. With all the unknowns, I'd lean towards the 100% too.

If you haven't done so already, you might want to write out a financial plan for DH and DS to follow. They'll at least have some direction and won't be going at it blind (explain it to daughter-in-law too) and you can go on, knowing you've done your best. I currently have my plan on spreadsheet and will write out the plan in more detail in a couple of years when we're closer to retirement.

Calvin
Print the post Back To Top
No. of Recommendations: 0
I think you're wong on the joints. He gets the full amount as long as he is alive. But if he dies, the survivor (you) get the designated percentage (50% or whatever).

No, I'm not wrong about the joints. There are two types:
One type has a percentage continuation to either survivor (DH or me).
One type has a percentage continuation to just me.

Are you certain of your numbers? Every time I've looked, the 10 yr cetain was more than joint&50%. What you posted was that it was *less*.

I copied the numbers directly from the documents we received from the actuarial consultant firm hired by the company.



Thanks again,

Jeanie
Print the post Back To Top
No. of Recommendations: 9
I've been thinking about this a little bit more. One thing that has been going around my head is that in the financial arena, quite ofter the "obvious" best choice is almost always *not* the best, and is often actually the worst. So I thought I'd play around with some figures.

Life Only pays $1121/mo, and Joint&100% Survivor pays $902/mo. In essence, you are paying $219 a month to insure that the survivor continues to collect $902 when one of you dies.

Now, what's the worst and best cases (in financial terms)?
For LO, the worst case is that he dies 1 day after receiving the 1st pension payment. You will get nothing forever.
For J&S, the worst case is that YOU die 1 day after the 1st pension payment. He'll still be paying (i.e., missing out on) the $219/mo forever--paying insurance for somebody who is already dead.

For LO, the best case is that you die first. He'll continue to collect the full $1121 forever.
For J&S, the best case is everything. Every possible combination of 1st to die is the same.

In either case, when the 2nd of you dies there is no other beneficiary--your kids get nothing. So in both cases, the worst case for the family is that you BOTH die 1 day after the 1st payment.

So, how can things be structured to best avoid the worst cases at the lowest possible cost? We already know that your base cost is $219/mo. Perusal of online life insurance quotes told me that for $219/mo a 65 year old non-smoker male in average health can buy a 15 year term life policy that will pay $225,000 when he dies.

So, what if he takes LO and also this life insurance policy? Your net income is still $902/mo. When he dies, the pension stops, and the insurance policy pays $225,000. If you put in it a bank account earning 4% you can withdraw $902/mo for 531 months---44 years. !!!! If you can earn 4.75%, you can withdraw $902 forever. At 0% interest, the funds will last 249 months--20 years.

Now the worst case for you has pretty much disappeared. When he dies, you will continue to collect $902 for at least 20 years, and probably for the rest of your life. If you die first, he can either continue the policy and keep the $902/mo or cancel it and collect $1121/mo.

BUT!!!!! What about the situation from the entire family standpoint? When the second of you dies, your beneficiaries--presumably your kids--will get either the $225k insurance or the balance of the savings account. So the family income will be $902 a month for at least 20 years, and could conceivably be $902/month forever. Jointly by the two of you while you are both alive, individually by the survivor when the first of you dies, and then by the kids when the 2nd of you dies.

This was fun.

Ray
Print the post Back To Top
No. of Recommendations: 0
This was fun.

Yes it was. It was also a lot of work on your part, Ray. Thank you for doing the exercise and sharing it.

I like your thinking on this. The $219 won't make much of a difference either way, but it is fun to think of ways to beat the house :-)

Cheers,

Jeanie
Print the post Back To Top
No. of Recommendations: 1
Rayvt: "I've been thinking about this a little bit more. One thing that has been going around my head is that in the financial arena, quite ofter the "obvious" best choice is almost always *not* the best, and is often actually the worst. So I thought I'd play around with some figures.

Life Only pays $1121/mo, and Joint&100% Survivor pays $902/mo. In essence, you are paying $219 a month to insure that the survivor continues to collect $902 when one of you dies.

Now, what's the worst and best cases (in financial terms)?
For LO, the worst case is that he dies 1 day after receiving the 1st pension payment. You will get nothing forever.
For J&S, the worst case is that YOU die 1 day after the 1st pension payment. He'll still be paying (i.e., missing out on) the $219/mo forever--paying insurance for somebody who is already dead.

For LO, the best case is that you die first. He'll continue to collect the full $1121 forever.
For J&S, the best case is everything. Every possible combination of 1st to die is the same.

In either case, when the 2nd of you dies there is no other beneficiary--your kids get nothing. So in both cases, the worst case for the family is that you BOTH die 1 day after the 1st payment.

So, how can things be structured to best avoid the worst cases at the lowest possible cost? We already know that your base cost is $219/mo. Perusal of online life insurance quotes told me that for $219/mo a 65 year old non-smoker male in average health can buy a 15 year term life policy that will pay $225,000 when he dies."


Only if he dies during the 15 year term of the policy. If he lives 15 years, than the price for a new term policy will be much higher. IMO, this scenario is one that calls for a permanent policy (which likely will buy considerably less than 225k of coverage).

"So, what if he takes LO and also this life insurance policy? Your net income is still $902/mo. When he dies, the pension stops, and the insurance policy pays $225,000."

Only if he dies during the term of the policy.

". . .

BUT!!!!! What about the situation from the entire family standpoint? When the second of you dies, your beneficiaries--presumably your kids--will get either the $225k insurance or the balance of the savings account. So the family income will be $902 a month for at least 20 years, and could conceivably be $902/month forever. Jointly by the two of you while you are both alive, individually by the survivor when the first of you dies, and then by the kids when the 2nd of you dies."


Only if he dies during the term of the policy.

Regards, JAFO
Print the post Back To Top
No. of Recommendations: 0
This was fun.

Yes it was. It was also a lot of work on your part, Ray. Thank you for doing the exercise and sharing it.

I like your thinking on this. The $219 won't make much of a difference either way, but it is fun to think of ways to beat the house :-)


Now that I'm officially retired, I have plenty of free time to mess around. 'course, before I retired, I made sure that my monitor had it's back toward my office door, so people walking in (especially bossman) couldn't see what I was doing. ;-)

Truthfully, thinking about this problem one day kept me awake until the wee hours. I should know better than to read TMF boards right before going to bed!

I didn't mention the other thing I thought about. To wit: You implied that this pension was only a small piece of your retirement income. That being the case, you might just take the highest payout and treat it as found money and blow it. That's what I did the first time one of my TMF portfolios had a blow-out profit. We took half of the $6000 profits and booked an Alaska cruise.

Ray
Print the post Back To Top
No. of Recommendations: 0
Only if he dies during the 15 year term of the policy.

That's correct. I didn't discuss this, in order to keep it simple(r).

There's no free lunch, so you have to protect yourself against the things that are important to you. You can't protect against everything or the cose of the protection would be more than the value you are protecting.

65 + 15 = 80, so you would be protected up to age 80. Is this good enough? Everyone would have to decide that for themselves. With my scenario, both spouses and the remaining family (who are always ignored in the options of pension payout methods) are covered until his 80th birthday. And if both spouses die before then, the descendents will still get something--which they won't in any of the usual options.

Everyone's bummer case is when they pay all this money for the annuity (i.e., pension) and the annuity company keeps it all when/if you die easrly. In fact, that's the exact reason that Whole Life insurance came into existance--so that you'd get something back in the case where you didn't die early.

I kinda figure that in 15 years you can manage to get your finances & investments arranged so that his death isn't a financial disaster to the wife.

For myself, I went with the 10 Year Certain. We don't really need the pension but I'd be really bummed out if I die early and the pension company gets to keep all that money.

Ray
Print the post Back To Top
No. of Recommendations: 0
Rayvt:

<<<<Only if he dies during the 15 year term of the policy.>>>>

"That's correct. I didn't discuss this, in order to keep it simple(r)."

But I thought that the omission made the earlier post misleading.

"There's no free lunch, so you have to protect yourself against the things that are important to you."

Ok.

"You can't protect against everything or the cose of the protection would be more than the value you are protecting.

65 + 15 = 80, so you would be protected up to age 80. Is this good enough? Everyone would have to decide that for themselves."


Assuming that they realized that the decision was being made now, at age 65.

"With my scenario, both spouses and the remaining family (who are always ignored in the options of pension payout methods) are covered until his 80th birthday. And if both spouses die before then, the descendents will still get something--which they won't in any of the usual options."

But what if H dies at 80.5 and W lives another 8 years, but without any part of the roughly 1100 in pension?

"Everyone's bummer case is when they pay all this money for the annuity (i.e., pension) and the annuity company keeps it all when/if you die easrly. In fact, that's the exact reason that Whole Life insurance came into existance--so that you'd get something back in the case where you didn't die early."

But what about paying 219/month for 15 years (gross $39,420) for insurance that was never collected, but which ultimately did not protect against the risk H dieing first and W surviving for years thereafter?

"I kinda figure that in 15 years you can manage to get your finances & investments arranged so that his death isn't a financial disaster to the wife."

That woudl be a large, unstated assumption.

"For myself, I went with the 10 Year Certain. We don't really need the pension but I'd be really bummed out if I die early and the pension company gets to keep all that money."

And here is hopng that you have many more healthy years to enjoy it.

Regards, JAFO
Print the post Back To Top
No. of Recommendations: 0
you might just take the highest payout and treat it as found money and blow it.

I really like the way you think, Ray ;-)

We're off to London on Sunday!


Cheers,

Jeanie
Print the post Back To Top