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Defined benefit pension income leveling ?
Old 10-27-2015, 06:10 AM   #1
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Defined benefit pension income leveling ?

Spouse retiring at 58 with "same payment for life" base amount, no COLA.

There's an "income leveling option" where instead you can take 117% of base amount for 4 years, to 62, then take 93% of that base amount for rest of your life.

With no time value of money, the payback period is about 14 years. Assuming a 3% discount rate annually on the cash flows, the payback period is about 16 years.

Female life expectancy at 58 is 26 years. So with no known health issues and no "crystal ball", it would seem that taking the 100% base amount forever option (not taking the "juiced up" 117% first 4 years) would be best ?

Just not sure how "opportunity cost" and taxes factor. All payments would be taxed each year (40% state and federal), and before tax return assumption would be about 5% for a blended stock/bond portfolio.

Appreciate any thoughts............
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Old 10-27-2015, 06:56 AM   #2
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What if you took the 17% for 4 years and invested it? When will you take SS? Can you live on the 93%? Lots of questions/potential scenarios.

Good luck
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Old 10-27-2015, 08:34 AM   #3
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DW has to make the same choice next year when she retires. My recommendation to her is to not take the leveling so she gets a maximum for life, as her family is long lived. We'll have plenty in the short term and I'm inclined to hedge against high expenses toward the end of our lives.

In my own case, the income leveling was mandatory and I invested the "extra" and I'll take SS at 70.
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Old 10-27-2015, 09:47 AM   #4
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I have a very similar "Accelerated Income Single Life Annuity" option for my pension. In my case the choice will be constant income from age 56 onward vs. 116% of that income from 56 to 62 and 92% from 62 on. While I don't address opportunity cost I did calculate what the breakeven age was for different inflation rates. I got:

0% 74
1% 75.2
2% 76.7
3% 78.7
4% 81.5
5% 86.1
6% 95.6

and for inflation above 6.7% you never break even. I'm still likely to go for the standard fixed annuity, but the numbers above make me wonder if that's the right choice. With sustained inflation above 4% I'd prefer the accelerated option. Of course with inflation that high my non-COLA'd pension won't be worth much by my 80's either way.
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Old 10-27-2015, 09:47 AM   #5
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This may be stating the obvious; however, the option sounds like it is designed to tide one over until SS kicks in. If you don't need it till then, then it looks like the standard amount would be the best option.
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Old 10-27-2015, 09:51 AM   #6
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Quote:
Originally Posted by travelover View Post
In my own case, the income leveling was mandatory and I invested the "extra" and I'll take SS at 70.
+1

If the extra 17% allows you to delay SS a year or two and get that may tilt the playing field in its favor. Remember that SS has a COLA, and that COLA applies to the 'extra' money you receive by delaying SS. That could prove very useful if one lives a very long time.
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Old 10-27-2015, 11:06 AM   #7
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Quote:
Originally Posted by Youngster View Post
This may be stating the obvious; however, the option sounds like it is designed to tide one over until SS kicks in. If you don't need it till then, then it looks like the standard amount would be the best option.
+1
Our plan is called Early Retirement Supplement and it is optional. One stipulation is that if you start SS for any reason (e.g. disability), they revise the payment. The figures for me were +33% and -13% so it was a no brainer since I was getting fed up anyway. I plan to take SS at 66.
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Old 10-27-2015, 01:12 PM   #8
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For plans subject to IRC 417e, the annuity must be restructured using the IRS segment rates and blended 417e mortality. Leveling options are similar to a lump sum situations in that regard. Did she receive a relative value notice?
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Old 10-27-2015, 01:43 PM   #9
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^^ We had to make a similar choice last year and chose to tough it out at the lower constant level to manage MAGI and get a better subsidy and CHIP for the y2kid. When SS kicks in we won't know what to do with all the extra money.
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Old 10-27-2015, 08:08 PM   #10
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Thanks for everyone's input. We don't need the extra money and will likely delay SS to 70 because of the COLA nature. Looking for best NPV.

It is "eye opening" how sustained high inflation impacts the break even (and the pension purchasing power in total).

I just don't understand how to model both "investing the difference" and inflation.

Quote:
Originally Posted by stepford View Post
While I don't address opportunity cost I did calculate what the breakeven age was for different inflation rates. I got:

0% 74
1% 75.2
2% 76.7
3% 78.7
4% 81.5
5% 86.1
6% 95.6

and for inflation above 6.7% you never break even.
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Old 10-30-2015, 10:27 AM   #11
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I'm going to be standing in line the second I turn 62 to get my soc sec, my dad died at 57 and I paid in for 30 years I want what ever it is before they give it all away
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Old 11-07-2015, 12:35 PM   #12
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Thanks for below. Our situations are similar - but the fact that you have 2 extra "turbo" years at 116% makes a big difference.

Using same analysis, I did break even for my spouse options (hopefully inserted image summary works)

Note the much wider range of payback years for various inflation rates under your scenario.



Life expectancy at 56 to 58 is 25+ years so "level payments" is way we are going.

But in back of my mind I remember the 70's....
Inflation and CPI Consumer Price Index 1970-1979

Quote:
Originally Posted by stepford View Post
I have a very similar "Accelerated Income Single Life Annuity" option for my pension. In my case the choice will be constant income from age 56 onward vs. 116% of that income from 56 to 62 and 92% from 62 on. While I don't address opportunity cost I did calculate what the breakeven age was for different inflation rates. I got:

0% 74
1% 75.2
2% 76.7
3% 78.7
4% 81.5
5% 86.1
6% 95.6

and for inflation above 6.7% you never break even. I'm still likely to go for the standard fixed annuity, but the numbers above make me wonder if that's the right choice. With sustained inflation above 4% I'd prefer the accelerated option. Of course with inflation that high my non-COLA'd pension won't be worth much by my 80's either way.
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