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Which Option?
Old 05-05-2015, 11:02 AM   #1
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Which Option?

Aloha from Hawaii, I have been following ER for years and are beginning to seriously plan for ER. DW and I are 3 years from retirement date (Age 57). I wanted some opinions on my Hybrid pension options.

The 3 options are:

1) 4500 a month / Beneficiary receives balance of Contributions 150K

2) 3940 a month / Beneficiary receives 3940 a month / if beneficiary dies retiree receives 4450.

3) 3550 a month and refund of contributions 150K

My CFP says Option 2, I say Option 1 (buy 200K life insurance for me)

Our Combined 457b is 600K, Roth 120K, Cash 120K, Annuity 24K a month till 2022 (inherited), Home paid for.
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Old 05-05-2015, 11:08 AM   #2
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Annuity 24k/month! wow. Why wait 3 years to ER?
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Old 05-05-2015, 11:11 AM   #3
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First of all, welcome!

Hard to say without knowing your specific cash flow needs. It may also depend on your health and family history of longevity.

Based on what I am reading, I would lean toward Option 2 over Option 1, especially if your wife is healthy and has a family history of relatively long lifespans. Here's why.

For Option 1, I assume that means if you die, your wife would receive nothing from your pension but would have the $150K plus $200K in life insurance proceeds. (You must factor in the cost of the life insurance to offset some of your pension while you are alive, of course, and the older you get, the more costly it gets.) How much income could $350K buy? I suspect that it would likely be considerably less than $3940 a month.

In any event, if you chose Option 1 I'd want to take as much of the after-tax difference in pension amounts ($560 pre-tax, so maybe $350 after tax, give or take) and invest it in some sort of balanced/moderate mutual fund or ETFs, perhaps something like a 50/50 allocation, which would provide more capital for your wife's remaining retirement if you predecease her.

Still, I think it would be hard for me to sleep at night if I selected a pension that had no survivor income baked into it.

Final question: is that annuity $24K a MONTH or $24K a year? If the former, the differences in these plans are almost noise if you can save/invest most of the payouts through 2022.
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Old 05-05-2015, 11:14 AM   #4
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Sorry 24K A YEAR. OOOPS
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Old 05-05-2015, 11:17 AM   #5
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so option 1 is a life annuity but they pay 150K death benefit?


option 2 is a 100% J&S popup with nothing back?


What is the bfcy age difference?
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Old 05-05-2015, 11:19 AM   #6
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the popup looks like a good deal not knowing the age difference
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Old 05-05-2015, 11:20 AM   #7
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Originally Posted by ziggy29 View Post
Based on what I am reading, I would lean toward Option 2 over Option 1, especially if your wife is healthy and has a family history of relatively long lifespans.
+1

I'd also choose Option 2.
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Old 05-05-2015, 11:22 AM   #8
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24k/year makes more sense in context.

I think option 2 makes more sense. As Ziggy said, the older you get the more costly LI gets.
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Old 05-05-2015, 11:56 AM   #9
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so option 1 is a life annuity but they pay 150K death benefit?
No this is a hybrid Pension I contribute 6% which is kept in an account.
The 150 k is the projected total in 3 years

option 2 is a 100% J&S popup with nothing back?
yes

What is the bfcy age difference?
same age 54
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Old 05-05-2015, 11:58 AM   #10
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but at the annuity starting date you both will be 57?
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Old 05-05-2015, 12:23 PM   #11
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I'd also pick #2, although it depends in part on your wife's feelings. When my Dad died, my mom was very reassured knowing a monthly check would continue. Although she has some investments, having to rely on those alone would make her very nervous and worried, even if they were financially equivalent.

To me, the security in option #2 is worth it.
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Old 05-05-2015, 12:38 PM   #12
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I'd also pick #2, although it depends in part on your wife's feelings. When my Dad died, my mom was very reassured knowing a monthly check would continue. Although she has some investments, having to rely on those alone would make her very nervous and worried, even if they were financially equivalent.

To me, the security in option #2 is worth it.
Same. Especially so if you've got COLA.
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Old 05-05-2015, 12:42 PM   #13
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Although she has some investments, having to rely on those alone would make her very nervous and worried, even if they were financially equivalent.
Another thing to consider. How confident and comfortable would the surviving spouse be to manage the investments? My dad did a lot of investing before he passed away, but while he was dying he moved everything into cash because my mom knows nothing about investing and wouldn't be comfortable managing her money like that. If a plan would need prudent management of investments and someone isn't comfortable doing that, it could pose a problem. (In my mom's case, I started managing all of the investments in her Vanguard accounts so she isn't sitting on several hundred thousand dollars in cash earning nothing.)
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Old 05-05-2015, 01:00 PM   #14
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but at the annuity starting date you both will be 57?
It is paying now til 2022
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Old 05-05-2015, 01:04 PM   #15
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If you go with option 1, your LI is short by about $1 million...


So, option 1 plus $1.2 mill of LI compared to option 2.... you have to price it out to be sure, but I bet option 2 is still better... I did the same calc for one of my sisters and her DH... the LI did not win..

One of the problems is you need a policy that does not go up in price for 30 or 40 years... those are expensive... and if you buy a policy for 20 years and after 21 pass on, DW has nothing... no annuity or LI proceeds... and for what How much are you really saving after considering the cost of LI
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Old 05-05-2015, 01:20 PM   #16
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If you go with option 1, your LI is short by about $1 million...

exactly - you need to quantify the value of the insurance feature embedded in the pop up versus the 150k refund and lower annuity
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