Help with making pension decision please

[Dreamer]

DH took a severance package from his company that started effective 12/10. He will receive his full pay for 18 months and he earned approx $74000.00 per year. That will end in 05/12. He also qualifies for 11/12 of a bonus for 2010, if there is one. Last year was the first year in 19 yrs that there was not a bonus. He would get somewhere between $12000.00 and $14000.00 bonus normally.

The day before the severance package came to our house (out of the blue), I told my DH that he could not keep working due to his disability. I was afraid that he was going to have a complete nervous breakdown and was worrying whether he was becoming suicidal. He filed for LTD and was approved. He does not receive any money from LTD because his severance pay is higher. The earliest that he can receive any money from LTD is 06/12, if he is still qualifies at that time. He is currently qualified because he can't do his job at his company, but 06/11 he has to meet the definition of not being able to do any job in our city that he has the experience and education, so a harder definition and he might be denied. He is considered a disabled participant through his company and accrues time for his pension purposes. If he stays disabled for LTD it would end at age 65. Unreduced age for his pension is age 60. DH turned 59 in 12/10.

Here are our choices. He can start his pension effective 12/10 and receive $1209.96 per month and withdraw a special retirement account (SRA) of $15 852.66 or $1288.00 per month not withdrawing the SRA. He must start his pension effective 12/10 if he wants health ins or life insurance in the amount of $10000.00. We do not want the medical ins as we are covered under Federal medical insurance through my pension. He does not have any life insurance. If he starts his pension, then his time with his company stops. If he should die while he is qualified for disability, his life insurance is $74000.00. That ends when his disability ends.

If he waits until age 60 (unreduced) to take his pension which would be effective 01/01/12 then his pension amount would be $1358.35 withdrawing the SRA estimated balance $16759.33 or $1442.37 not withdrawing the SRA. If he waits until age 65, then his amount effective 01/01/17 would be $1674.83 withdrawing the SRA estimated balance $20577.22 or $1787.40 without withdrawing the SRA.

If he starts his pension and he still qualifies for LTD in 06/12, his pension will be deducted from his LTD amount which is higher.

I am also trying to take into account how much of pension would go to taxes. His 401K has ended, so I am assuming that we will have to pay more taxes. We were maxing out his 401K. I receive a pension of approx $36000.00 per year and work a part-time job working 24 hrs per week at $8.50 per hour. I will be with my job a year in 03/11 and think that my salary will go to $9.00 per hour. I will qualify to participate in a 401K at work at that time and plan to put whatever the max I am allowed. For tax purposes, we have no dependent children, own our house and do not itemize.

If DH is going to take his pension starting 12/10 then they have to receive the paperwork by 01/31/11.

Thank you in advance for any help.

[Htown Harry]

Dreamer,

First, my sympathies for the situation you find yourself in. Simultaneously dealing with the stress of an ailing spouse and financial uncertainty is a combination that would wear on any of us.

Stay positive. Be grateful that DH has been declared eligible for LTD and his benefits, retirement and severance packages create financial options. Many folks facing similar health circumstances would be facing even greater financial stress.

That said, this is a once-in-a-lifetime financial crossroads for you and DH.

ER has been thrust on your husband. Now you and he have a lot of moving parts to consider in a short period of time (10 days!). Some of the decisions you will make may be irrevocable. Worse, many of the future variables are unknowable, most notably your husband’s progress toward improved health and the insurance company’s future interpretation of the tighter criteria for continuing disability payments.

Seeking help and advice is entirely appropriate.

I spent some time re-reading your post and trying to find “the” answer to your dilemma. My conclusion is that it is unlikely that even the sage advice of this forum can give a balanced answer to your questions; a simple present value calculation is insufficient.

Some of the unknowns that are relevant:

1. Living expenses?
2. Your age?
3. Available emergency / savings / retirement accounts?
4. Expected SS income for you and DH? At what age you plan to start to withdraw?
5. (very important)You described DH’s eligibility to begin pension payments at age 59 (now), age 60 (January 2012) and at age 65. Must the pension payment stream begin on his birthday, or could it begin on 5/2012 when the severance pay ends?
6. (critically important) Are there surviving spouse options available for the pension?
7. Related to the life insurance benefits and question #6, what is your need for life insurance on DH? I assume it is to replace his income stream from salary, LTD and/or a DH life-only pension if he dies before you.
8. Given his disability, is he (will he be) qualified to obtain life insurance in the marketplace?
9. The converse of questions #6 and 7, for the scenario where you predecease DH.
10. Whether adding DH to your health insurance carries complications or risks relative to his disability.
11. If adding DH to your insurance is problematic, is COBRA continuation of his megacorp policy an option?

Attempting to quickly elaborate on all of these issues via friendly strangers on the internet is the wrong approach, IMO. There are just too many traps. You and DH need to speak directly with the benefits staff at Megacorp and, IMO, someone knowledgeable who can go back and forth with you in a conversation to find the “right” answers for you. (I purposely didn’t say “best” answer. There is none.)

If I were in your shoes, I would want to speak with a fee-only financial planner before the 1/31 decision deadline. My action items would be:

1. Today – research ER.org threads on financial planners and call your mutual fund or brokerage house for some names. If you have trusted relatives or friends who may have a referral, get names from them.
2. Sunday – spreadsheet day
3. Monday morning – Have DH call the HR/benefits staff to set a late-week appointment for you two to come in and ask questions. Ask about #5 and #6 above in the meantime, while making the appointment. (Don’t expect advise from HR, only facts that allow you to be better informed as you make the pension / insurance decision.) Also ask if there is access to unbiased advisors via megacorp's employee assistance program.
4. Later Monday morning, get on the phone to get a planner lined up.
5. Before the HR meeting, you and DH take your spreadsheets and questions to a meeting with the planner. Getting suggestion for questions to ask of the benefits staff (or plan documents the planner wants to review them) is one immediate objective.
6. You and DH meet or talk with the HR staff.
7. Meet or talk again with the planner, if necessary.
8. Make your decision a few days before Monday the 31st

I’ll PM you with some notes on how I interpreted your numbers and scenarios you might put in a spreadsheet.

Good luck.

[clifp]

Great helpful post Harry. There are lots of moving part outside advice would be really helpful.

[Dreamer]

Htown Harry,

Thank you so much for your thoughtful reply and PM. I will try to answer as best as I can. I have to admit that I have not been very good at keeping track of our finances. DH has never shown any interest at all. Neither one of us has ever done a spreadsheet in our lives and we do not have Excell on our computer. I am using my DD's apple laptop and she probably has some type of program on it.

1. Living expenses are really unknown. We do not owe any money-only what we charge each month of credit card and we pay off every month. I tried to figure up if I could live on my pension alone, when I retired, and figured that I could, but would need to live very frugally. My pension is $3065.00 gross. I have taxes, health insurance and Long Term Care taken out of my pension, so the net is a little over $2000.00 per month.

2. I am 57, will be 58 in March 11.

3. I am guessing that we have approximately $600,000.00 in savings, 401Ks, and TSP and IRAs. I only look at the total maybe once a year.

4. I will not receive social security, unless I finish getting my ss quarters. I am retired Federal employee. DH is supposed to get approx $1200.00 per month at age 62. He will take SS retirement, if his LTD stops. His LTD will be $4310.00 per month.

5. I think that he can start his pension any month, but will check to make sure.

6. The pension amounts that I gave you were 100 percent surviving spouse.

7. Life insurance would be for burial/cremation purposes only.

8. I doubt that we would try to get life insurance for him. Burial would come out of savings.

9. He will receive a higher amount of pension from mine, if I were to die first. I already had whatever the highest amount you could give your spouse was, when I filed. Dont remember what that percentage is now.

10. DH is already covered on my health insurance.

I truly feel blessed to have these different financial considerations. I am truly hoping that DH will recover and be the happy , go lucky person that I married. It is frustrating to me, that he did not get better after he quit working. However, I realize that there are many people facing disabilities without hardly any financial means. We have always been pretty frugal on most things and we will make it on whatever amount that we have to live on. Thanks again.

[clifp]

With the huge caveat that Harry suggestion of talking to the folks at Megacorp and following his time table is really important. Let me give you my take on the basis of running the numbers for all of 15-20 minutes and realizing that I'm clueless on disability and how it works. Hopefully that is sufficient disclaimers.

1. Take the higher pension as opposed the supplemental retirement account. The increase of $78 month is modestly higher than an annuity that you could purchase on your own and represents a 6% withdrawal rate.
2. The calculations for when to take the pension, are quite a bit more complicated. There isn't a clear choice between now, 60, or 65. However, I would be inclined to take the money now for the following reasons. The payback period for now vs later (i.e. the time when getting the 13 months of pension now is worth more than than the $154/month next) is 9-11 years depending on your interest rate assumptions. The $10,000 of life insurance available now makes the payback period much longer.

Most things like LTD are mean tested based on income not assets, having a higher income will likely result in a greater reduction of benefits. Any reduction of benefits or higher taxes pushes the payback period even further out. That said since the higher payments included 100% survivor benefit and if you are in good health and have good genes, than having the extra income maybe very helpful. All in you guys seem to be in fine financial health, now if DH physical health improves that would be great.

[Htown Harry]

Dreamer, there's much to be optimistic about in these added details.

I still think you should talk directly with the pension folks at megacorp and use some knowledgeable person as an outside sounding board, both before the end of the month.

If available, the EAP program through megacorp may be the most expedient way to identify an advisor (or advisors).

Don't feel like you have to learn to use an electronic spreadsheet to lay out the basics of your changing income picture. Spreadsheets can speed up the work, but old-fashioned ledgers have served as suitable accounting tools for centuries.

Simply draw a grid with:

• columns representing 2011, the first half of 2012, the second half of 2012 and each of the subsequent years until you turn 65. (Income in the years after age 65 won't change too much, so don't worry about them now.)
• rows representing each of the potential sources of income (your pension, his severance salary, his disability, his pension, his SS, your potential SS, withdrawal from savings, work income, etc.)

Make a bunch of copies of your labeled grid before filling in any numbers (you'll be creating one set of what-if numbers per sheet.)

Enter monthly income values in each box corresponding to a given year and income source. For example, the row for severance pay will have $6100/ mo. in the first two columns and zeros in each box to the right. Your pension income will have entries of $3065 all the way across, or a little bit more each year if you want to estimate COLA's.

Adding up the values in each column will show expected gross monthly income during that year.

The challenge and your reason to plan, of course, is your DH's income will be varying quite a bit over the next several years.

The highest income scenario for DH might be $6100/ month severance pay through the first half of 2012, followed by $4310/ month LTD until age 65, followed by perhaps $1400 per month SS plus a $1700 +/- per month pension.

Another scenario would be that his pension can start at any time and he feels better before the severance checks run out. In that case: $4310 / month through mid-2012, a $1400/ month pension going forward from that point plus a $1200/month SS payment beginning at 62. Although joyful, this is a more challenging financial scenario because his income will drop more severely after the severance pay ends. Withdrawals from savings or DH returning to work may be necessary to bridge the gap.

I could go on, but these kind of income estimates and a realistic spending plan are the basics of ER cash flow planning. It's mathematically more challenging than managing steady dual incomes at a LBYM level as you have done for so many years, but not so complex that you can't develop your own firm understanding of what your options are at any given time.

HH

[Dreamer]

Clifp:

I was thinking that it would be better to take the SRA as a lump sum. I did not realize that by not taking it as a LS, the rate would be equivalent to a 6 % withdrawal rate. It does seem like it would be better to take the higher pension.

The LTD amount is affected by any other income that DH receives, such as social security disability, his pension, etc. If he starts his pension before his LTD kicks in, then the pension will be deducted from his LTD amount beginning 06/12 through age 65, if he still qualifies for LTD.

Another thing that I forgot to throw in is that if he does not file for his pension and dies, then the amount that I would receive would be 50%, not the 100%.

Htown Harry:

I realize that you are giving me excellent advice regarding meeting with HR and a financial advisor. The plant where he was working was bought out by another company and the HR for the company that he worked for are not local. We have been talking to them by phone and email. They have been giving us answers to our questions and benefit amounts. We have never used a financial advisor and would not have time to set this up. I work Mon, Wed and Fridays and this has to be received back to them by 1/31/11. I would probably put in the mail on Wed. I will try working up some spreadsheets as you have advised.

I was trying to figure it this way. If he were to take the $1209.96 times the 18 mos that he would receive it before his LTD started, would equal $21,779.28. If you added the 10000.00 life ins then it would be $31779.28. I then divided the amount by the difference in the 12/10 amt and the age 60 amt of $148.39 and divided that by 12, it appears that he would be ahead by 17.84 years. However, if you take that same amount and divide it by the $464.87 difference between 12/10 and age 65, he would only be ahead for 5.6968 years. Of course, this is all dependent on whether he ever receives any LTD or not. If he is denied his LTD in 06/11, then we will probably start his pension at age 60. If he receives his LTD, then I was thinking that it would be better to wait until age 65 to start his pension. I am in good health, but my parents died at 61 and 63. However, they lived a hard life. I started out living a hard life, but cut out most bad habits by my mid thirties. I have several aunts and uncles, who are in their seventies and some in eighties. My DH's parents lived to be in their mid seventies, but also lived hard lives (drinking and smoking). Any additional thoughts? Please feel free to jump in on any mistakes in my way of thinking or any other suggestions. Thanks.

[chinaco]

Sorry to hear about your DH.

You are doing the right thing working out a plan.

[Mulligan]

Quote:

Originally Posted by Dreamer DH took a severance package from his company that started effective 12/10. He will receive his full pay for 18 months and he earned approx $74000.00 per year. That will end in 05/12. He also qualifies for 11/12 of a bonus for 2010, if there is one. Last year was the first year in 19 yrs that there was not a bonus. He would get somewhere between $12000.00 and $14000.00 bonus normally. The day before the severance package came to our house (out of the blue), I told my DH that he could not keep working due to his disability. I was afraid that he was going to have a complete nervous breakdown and was worrying whether he was becoming suicidal. He filed for LTD and was approved. He does not receive any money from LTD because his severance pay is higher. The earliest that he can receive any money from LTD is 06/12, if he is still qualifies at that time. He is currently qualified because he can't do his job at his company, but 06/11 he has to meet the definition of not being able to do any job in our city that he has the experience and education, so a harder definition and he might be denied. He is considered a disabled participant through his company and accrues time for his pension purposes. If he stays disabled for LTD it would end at age 65. Unreduced age for his pension is age 60. DH turned 59 in 12/10. Here are our choices. He can start his pension effective 12/10 and receive $1209.96 per month and withdraw a special retirement account (SRA) of $15 852.66 or $1288.00 per month not withdrawing the SRA. He must start his pension effective 12/10 if he wants health ins or life insurance in the amount of $10000.00. We do not want the medical ins as we are covered under Federal medical insurance through my pension. He does not have any life insurance. If he starts his pension, then his time with his company stops. If he should die while he is qualified for disability, his life insurance is $74000.00. That ends when his disability ends. If he waits until age 60 (unreduced) to take his pension which would be effective 01/01/12 then his pension amount would be $1358.35 withdrawing the SRA estimated balance $16759.33 or $1442.37 not withdrawing the SRA. If he waits until age 65, then his amount effective 01/01/17 would be $1674.83 withdrawing the SRA estimated balance $20577.22 or $1787.40 without withdrawing the SRA. If he starts his pension and he still qualifies for LTD in 06/12, his pension will be deducted from his LTD amount which is higher. I am also trying to take into account how much of pension would go to taxes. His 401K has ended, so I am assuming that we will have to pay more taxes. We were maxing out his 401K. I receive a pension of approx $36000.00 per year and work a part-time job working 24 hrs per week at $8.50 per hour. I will be with my job a year in 03/11 and think that my salary will go to $9.00 per hour. I will qualify to participate in a 401K at work at that time and plan to put whatever the max I am allowed. For tax purposes, we have no dependent children, own our house and do not itemize. If DH is going to take his pension starting 12/10 then they have to receive the paperwork by 01/31/11. Thank you in advance for any help.

Hello Dreamer, And my sympathy for your husbands health. Although this is a lower level concern for you, you mentioned in point 4 on a post about getting more credits to qualify for social security. Before you would consider going to work for that explicit reason only, I would talk to someone in the know about the dreaded "Windfall Elimination Provision". This concerns people with pensions trying to draw soc. security. A lot of people are unaware of this. I was busy patting myself on my back for accumulating soc. sec. credits only to find out I will only get about 40% of what they are projecting when Im eligible. The following statement comes from Soc. Sec.
A pension based on earnings not covered by Social Security can affect the amount of your Social Security benefit. We do not know whether you are eligible for such a pension, so the benefit estimates on your Social Security Statement have not been adjusted for such a possibility

[Dreamer]

Thanks, Mulligan. I already did know that. I am currently working a part-time job and have 1/2 of the credits that I need. I enjoy the job for the most part, like the people that I work with and some days I am really glad to have a reason to leave the house. I am hoping to have enough social security to pay for my Medicare some day. I also know about GPO (Government Pension Offset) and that I will never receive social security off of my DH's record. I keep wondering if I will last for 5 more years, but some days I look forward to getting out of the house and going to an easy job.

[Htown Harry]

Quote:

Originally Posted by Dreamer Clifp: Another thing that I forgot to throw in is that if he does not file for his pension and dies, then the amount that I would receive would be 50%, not the 100%.

This is a very, very significant consideration.

Quote:

Originally Posted by Dreamer this has to be received back to them by 1/31/11. I would probably put in the mail on Wed.

If there was ever an occasion not to trust first class mail, this is it. use USPS or FedEx overnight delivery.

Quote:

Originally Posted by Dreamer I was trying to figure it this way....

I'm not qualified to comment on these calculations. Like I said, if I was in your shoes...

That said, I am more encouraged by your situation and your knowledge of the details with each post.

The way I see it, your pension, your retirement savings nest egg, the boost afforded by the 18 months severance pay and the possibility of a continuing LTD payment greater than DH's pension amount all add up to a secure retirement. Sure, optimizing to calculate a "best" pension payout might net some extra dollars over your remaining lives, but most of the differences don't appear to be that significant. (Except for the one noted above.)

Besides, FI vs. FI + probably won't make you happier. Make your decisions using the information you have, lick that envelope and go forward into DH/DW shared ER with a smile on your face.

[Bestwifeever]

Dreamer, what a life change for you and your DH in a short time. I agree from what you've said here that your finances seem to be healthy but doing a little back of the envelope spreadsheet (and plugging some numbers into Firecalc) will reassure you, I hope. Your DH is lucky to have you.

You have gotten some wonderful feedback from Harry and Clif--so helpful!!!!

[packrat44]

Quote:

Originally Posted by Htown Harry The highest income scenario for DH might be $6100/ month severance pay through the first half of 2012, followed by $4310/ month LTD until age 65, followed by perhaps $1400 per month SS plus a $1700 +/- per month pension. Another scenario would be that his pension can start at any time and he feels better before the severance checks run out. In that case: $4310 / month through mid-2012, a $1400/ month pension going forward from that point plus a $1200/month SS payment beginning at 62. HH

Htown Harry,

You beat me to it. I was ready to propose the same path to follow.

[chinaco]

Dreamer,

Based on your post on the carrying a mortgage in retirement comment, it sounds like you and your DH are facing a number of big life decisions.

If I were in your situation, I would not try to make all of those decisions in a series of near term moves. The reason is that they are permanent. It is easy to get thing tangled and confused and make less than optimum decisions.

Develop a financial plan to support income. Consider all angles on the pensions due and SS along with amount due based on age. Also consider your combined health and longevity history.

Once you have developed an overall financial plan for income, look at the best and worse case scenarios. Consider if the worse case scenario happened right after you built your new home. Would you have done anything different in terms of the pension decisions and the home decision? Could either one of you live on the money if the other passed on? Could you or he take care of the home?


I know a couple that rushed to build their dream home after they ERd. He had a health problem but could manage fine. Both of them worked part-time to help with finances (they were in the mid 50s). He died suddenly after being in that home for about 3 years. The wife was now in a home that she could not sell (because of the meltdown) and she had a difficult time managing it. Once her DH passed on, that home was little more than an unwanted complication in her life. It was more home than she could take care of.


Some of these decisions may be bounded by a time. Others are not. Take your time and work through the scenarios and numbers. If you are planning on a home mortgage and want to try to lock in a low rate that is understandable... but do not let that drive to a rushed decision... it is a big life decision.

Part of the art of planning is to consider the down-side... what if the worse happens. Both income and other aspects of your situation. While I would not let some future (may possibly happen) situation drive my every decision... I would make sure I had a contingency plan that was acceptable and workable.

[Dreamer]

Quote:

Originally Posted by chinaco Dreamer, Based on your post on the carrying a mortgage in retirement comment, it sounds like you and your DH are facing a number of big life decisions.

I am not sure what I posted or if you have me confused with someone else, but we are not planning on buying another house. Our house is paid for, but could use some work. I would like to sell it someday, and do either the condo or apt scenario, so that it would be easier to travel.

Today, I am thinking about just going ahead and taking the pension effective 12/10. I have always been pretty conservative with our finances and think that it might be a good idea to get the 100% survivor pension locked in and the $10000.00 life insurance. I think that I am going to go home tonight and try to talk it over with DH and if he does not have any strong feelings one way or the other, go with the 12/10 date. I will probably sleep on it overnight and then call the retirement person again. I think that the only thing that I would like to change would be to not withdraw the SRA and take the higher pension.

Thanks again and if anyone has anything else I should consider, fire away.