Company pension ...100% Joint and Survivor Annuity or Insurance?

[stephenson]

Hi All,

Have another active thread on in service 401K to IRA, but during review of options I developed another question.

My aerospace company pension monthly would be $2700 with "single life annuity" (meaning, I think, that the pension would terminate with my death). The "100% Joint and Survivor Annuity" amount is $2293 ...a $407 difference that I assume is used by company to purchase insurance to continue the annuity for my spouse who will likely outlive me (we're both 60 and in good health).

So, given this net difference, am I better off doing the same thing with universal life or some other mechanism that builds a cash balance, and if I enjoy a long life, passing this on to kids?

This sounds like the choice I made when I retired from military ...I took the government insurance and a lower retirement, but the circumstances have changed with kids out of college and working independently.

Would appreciate your perspectives!

 

[Senator]

It sounds like your kids are old enough to be on their own. Why not just self insure, and have fun spending it. Let them get the scraps after you are gone.

I have no life insurance outside of work. Life insurance is meant to replace what you are providing to your dependents, not give someone a bonus when you die.

Never be worth more dead than alive...

 

[dmdunca44]

If you die before your wife, what will she have to live on?

My husband had to make the same decision when he retired. He proposed taking the single life annuity and buying life insurance. I told him I did not want to be a grieving 80+ widow (possibly suffering cognitive decline) and have to make a critical decision about how to cope with a large amount of money tnat had to last the rest of my life.

He chose the 100% joint survivor option and I am grateful for the peace of mind it gives me.


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[martyb]

I recently retired from the federal govt. and I chose the full survivor benefit that they offer, which gives my spouse 55% of my pension if I go first. I also will eventually have a smaller military reserves retirement, and she will also get 55% of that. She has always worked, but at lower paying jobs and thus her SS will not be very much. Due to WEP my SS will be very small, and she won't be able to get much if anything from my SS either. Our invested portfolio isn't huge, so the best thing I can do for her is the 2 survivor's benefits.

The cost for survivor bens from my federal pension is $358 per month. Not sure yet how much the military one will cost, but most likely around $150 or so.

 

[ERD50]

I'll need to make this decision in ~ 5 years. I don't think there is any simple answer, I think you need to build a spreadsheet after getting some insurance quotes. Some things to consider:

I'm assuming your pension is non-COLA. But either way, the pension does not pass any wealth to heirs (other than non-directly, by providing cash flow so that the NW is not drawn down by that amount). So by including 'passing some on to the kids', you are making this less apples-apples. That might be fine, you can weigh that benefit, but in some ways it makes a comparison difficult.

Other things that complicate this - as each year passes, you need less and less insurance to cover the lost pension if you choose 'single annuity'. How to model that? Are there declining balance insurance policies? At 60 YO, I don't think you can get term beyond 20 years? You might also assign some investment growth to any 'savings' for the single-life scenario.

And comparing to the 4% SWR is not apples-apples either. That 4% is inflation adjusted (compared to non-COLA pension), and likely some $$$ will remain at the end.

I lean towards self-insuring, but this is an area where us individuals may be able to buy into some cheap 'risk pooling' (similar to delaying SS). I have not analyzed this precisely, but my semi-educated guess is that your pension provider isn't trying to make any profit on this decision (which an annuity or insurance company must), and they have essentially zero cost to your decision, so I suspect this a pure cost-neutral mortality table decision for them. If that is the case, and you take the reduced payout, numerically you 'lose' if you live a long time (do the math, probably right around your expected average LE). But if you pass before the tables indicate, your surviving spouse 'wins' numerically.

I suspect that you will find this to be the cheapest insurance you can get, but I'd need to run the numbers for each scenario to prove this. My gut tells me it will be. But also consider, do you need this 'insurance'? If not, it's really a 'gamble' as to whether you outlive the table or not.

At least those are my thoughts, hopefully others will chime in in case my thinking is off-base, and/or I missed something.

edit/add:

... He proposed taking the single life annuity and buying life insurance. I told him I did not want to be a grieving 80+ widow (possibly suffering cognitive decline) and have to make a critical decision about how to cope with a large amount of money that had to last the rest of my life.

He chose the 100% joint survivor option and I am grateful for the peace of mind it gives me. ...

Thanks, that's a consideration I didn't think of since I was just thinking 'numbers' at the time. That is one more point in favor of the increased spousal benefit.

-ERD50

 

[ERD50]

One more thought - The pension provider may need to "charge" a bit more for the survivor benefits than a mortality table would suggest. There could be some self-selection that could throw this off? If someone knows they expect a short LE, they will go for the survivor benefits. No one can be as certain of a long life. So that might twist things a bit. But if it is a big delta, that will be apparent in a spreadsheet analysis, compared to mortality tables. I'm guessing it is real, but relatively small.

-ERD50

 

[MooreBonds]

Hi All,

Have another active thread on in service 401K to IRA, but during review of options I developed another question.

My aerospace company pension monthly would be $2700 with "single life annuity" (meaning, I think, that the pension would terminate with my death). The "100% Joint and Survivor Annuity" amount is $2293 ...a $407 difference that I assume is used by company to purchase insurance to continue the annuity for my spouse who will likely outlive me (we're both 60 and in good health).

So, given this net difference, am I better off doing the same thing with universal life or some other mechanism that builds a cash balance, and if I enjoy a long life, passing this on to kids?

This sounds like the choice I made when I retired from military ...I took the government insurance and a lower retirement, but the circumstances have changed with kids out of college and working independently.

Would appreciate your perspectives!

A 60 year old male, non-smoker, 5'8", 170 lbs in Virginia, using lifequotes.com could buy a 20 year term policy with a $1,000,000 death benefit for under $450/month, assuming high underwriting class.

So it looks like if you took the single life annuity, paid taxes on it, and took $450/month for the insurance after taxes, you'd have roughly the same amount after-taxes as doing the survivor annuity with no life insurance policy.

So one question could be, would you rather have a $1,000,000 20 year term policy on your life (from which your wife could spend $40,000 and have something left for the kids), or just have a survivor annuity? Or perhaps a $500,000 20 year term for about half the cost at $250/month?

Do you feel your health/family history would have at least another 20 years?

 

[2B]

A 60 year old male, non-smoker, 5'8", 170 lbs in Virginia, using lifequotes.com could buy a 20 year term policy with a $1,000,000 death benefit for under $450/month, assuming high underwriting class.

So it looks like if you took the single life annuity, paid taxes on it, and took $450/month for the insurance after taxes, you'd have roughly the same amount after-taxes as doing the survivor annuity with no life insurance policy.

So one question could be, would you rather have a $1,000,000 20 year term policy on your life (from which your wife could spend $40,000 and have something left for the kids), or just have a survivor annuity? Or perhaps a $500,000 20 year term for about half the cost at $250/month?

Do you feel your health/family history would have at least another 20 years?

This works if the OP dies before the policy expires at age 81. If he dies at 82, his DW gets nothing.

 

[Moemg]

I would check to make sure that the health benefits are not attached to the survivor benefit before I would cancel it . I was widowed at 51 . My husband who had incredible longevity in his family had just been retired two years from the federal government when this happened . I was so grateful that I had the steady income while I handled all the other financial matters that come with handling an estate .I was also able to keep my health benefits which enabled me to work part time as I was grieving .

 

[Animorph]

This works if the OP dies before the policy expires at age 81. If he dies at 82, his DW gets nothing.

+1. Probably no fun buying term life at 80 either. Is the DW financially savvy enough to invest a lump sum to replace annuity income?

I might go single life on my DW's pension, but I am our financial planner. If the situation was reversed I'd do the joint life option. Of course the fact that I'm older and male and will probably kick off first also helps.

 

[Big_Hitter]

If you want a straight life annuity your wife will have to sign a notarized form rejecting the 50% J&S benefit.

What actuarial equivalent basis are they using to calculate the 100% J&S?

 

[stephenson]

Wow ...great thoughts ....gives me a lot more to think about ...I could have been more helpful by putting in a bit more info, but didn't realize it ...

No health issues and both sides blood relatives usually made it into their 80s and some 90s ...well, those that didn't smoke ..not many of them made it to 65.

Wife would have following if I die first: (I know this is rough, but I just got annuity number based on the amount at 3% ...kind of worse case scenario)
- 50% of my mil pension
- 401K from mega corp
- IRA from our early life worth about half the military retirement
- converting other assets via annuity about the same amount as the 401K
- social security

Another point I didn't cover ...about half of my mega corp pension is available as a lump sum payment ...I could take it as an offset and invest and take the single life annuity ...sort of a halfway position, even though pension numbers are a bit better than buying an annuity.

If I get the point of some of the suggestions, the issue is balancing the risk ...if you don't balance it with the 100% joint survivor annuity! then balance it some other way?


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[stephenson]

Forgot to note, we use military Tricare and pay for a secondary health insurance plan ...

 

[supernova72]

My folks were in a similar sitation and my dad chose the 50% survivor pkg. I know he and my mom sat down to discuss it first of course. When my dad passed in 2006 I became the finance support guy replacing my dad (rest in peace dad).

I can say now that 8 yrs have passed for my mom 50% was plenty. With a 3% WD rate from his/her investments, mom gets dads ss, and half his pension she's doing just fine and she "thanks her lucky stars". Now I must say they were savers from day one and a house pmt was not in their plan---so she downsized and put another chunk in a safe spot.

The pension is about 1/3 of her income. It pays her medigap and fed tax and some WAM money. Cheers!

 

[Running_Man]

To me this is a no-brainer, my wife or myself would get the same benefits. So I would and did take a lower pension in order for 100% survivor benefits. We will make do on the same amount of money. So all of my decisions on retirement lead to either of us having the same amount when only one is left - it will be reduced from when we were both alive but for every benefit I have exclusively she has a matching offset. It gives her and me peace of mind, the money is not that overwhelmingly important for the improved benefits when we would gain while we are both alive.

 

[MooreBonds]

This works if the OP dies before the policy expires at age 81. If he dies at 82, his DW gets nothing.

yes, but if he passes at 82, they received his pension for 20 years.

The point of insurance is to make sure that his pension is paid for at least 20 years. At least by age 82, they will have been able to have fun with the pension at least and ensured a (hopefully) comfortable retirement.

As an alternate, you could consider
10 year term $300,000 policy
15 year term $300,000 policy
20 year term $300,000 policy
(or whatever $ value you think would be appropriate, perhaps $200k or $250k?)

The premiums would be cheaper, and you presumably don't need as much of a portfolio to last 10 years as you would 20 years - so you don't need insurance coverage for as long.

Regarding the OP taking half of the corporate pension as a rollover -I'm a big believer in diversification, so I'd definitely give that a very serious consideration. Roughly what is the 'yield' that the pension monthly payout would be paying? (i.e. monthly pension payout divided by the lump sum they'd give you)

 

[stephenson]

Hi ...."yield" is 0.0066 (monthly pension/total lump sum) ... hadn't considered doing the simple calculation ...how does one convert it to a meaningful metric ...?

If I run simple annuities ... To match monthly pension, it works out to 7.5% at 30 yrs, 6.8% at 25 yrs and 5.5% for 20 ...no surprises.


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[pb4uski]

See Creating a Life Insurance Ladder

It provides a framework for buying a "ladder" of term insurance policies where the benefit declines over time reflecting that if you pass your wife would need less of a premium to buy a SPIA (or simply provide funding) to make up for the loss of your life only pension.

I'm a couple years away from the sweet spot of drawing my pension but will consider this as an alternative when the time comes.

 

[Bigbass]

I was in your situation ~2 yrs ago; I ended up with partial lump sum and partial single life annuity. I'm went with the single life because DH is about 8 yrs to my senior and as part of my retirement, I have a co paid life insurance policy = to one yr salary till I'm 65 (53 at that time), then it will be reduced to 1/2 yr for the rest of my life. But most importantly, he doesn't need my pension to live on. Up to this point, the gains from the lump sum exceeding what I would have received from the monthly annuity. Today, I'm still comfortable with the decision I made, but only time will tell if I made the right call…

But I want to share a co-worker's decision with you -

Single, took the monthly annuity. With the guaranteed monthly income in mind, she got a lot more aggressive with her 401K. Two years later, she feels as if she got the lump sum and the monthly annuity because of the huge gains in her 401K. Of course hindsight is 20/20! So, unless you can predict when you’ll die and how the market will perform in the future - I think you just have to go with what'll make you sleep well at night and that will be your best decision!

The fact that we have a pension, we are ahead of the game already! Good luck to you!

 

[unno2002]

When I retired from federal civil service, we went with a 25% survivor benefit pension, with sufficient term life insurance to pay off rental property mortgages if I drop over "early". The insurance premiums are less than the cost of a higher survivor benefit, and in our worst month (if the mortgages were paid off) the after expense rental income would exceed my full pension.

 

[Teacher Terry]

My hubby & I did the 100% survivor option because both of us would need the $ in retirement. We felt it was too risky to go the insurance route. My parents also did this & it worked out well for them. I believe in a "bird in the hand."