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Help with pension payout options
Old 01-12-2011, 02:07 AM   #1
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Help with pension payout options

Need advice regarding non-COLA pension payout options. At age 60, what's the better option to provide for my wife (her age would be 55)?:
  1. Standard single life income annuity payout of $56K, no benefit to beneficiaries. Buy term life insurance separately.
  2. Single Life Income annuity payout of $52K, with up to 20 years paid to beneficiaries.
At first, I liked option #2, because of the 20-year beneficiary guarantee, plus it continues to pay as long as I live. But the more I thought about it, it seems like I could buy a lot of insurance for my wife with the additional $4K/year from option #1. Plus, since we'll have additional income from IRA at Vanguard, I wouldn't have to necessarily insure to replace the entire pension amount.

Thoughts or other considerations?
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Old 01-12-2011, 05:47 AM   #2
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Originally Posted by 4merKPer View Post
Need advice regarding non-COLA pension payout options. At age 60, what's the better option to provide for my wife (her age would be 55)....

At first, I liked option #2, because of the 20-year beneficiary guarantee, plus it continues to pay as long as I live. But the more I thought about it, it seems like I could buy a lot of insurance for my wife with the additional $4K/year from option #1. Plus, since we'll have additional income from IRA at Vanguard, I wouldn't have to necessarily insure to replace the entire pension amount.

Thoughts or other considerations?

I hear the stampede of insurance agents right now!

Not enough information provided... but here are a few random thoughts to consider as make your decision.

BTW - Take your time studying, modeling, and analyzing your options. Compare and contrast the pros and cons of each and discuss them with your DW so she is involved in the decision and understands what it means and how it will work.

The random thoughts...

It depends. You are likely to find that there is no "free lunch" to exploit. But if you are careful and know all of your goals you might be able to optimize your solution.

For your DW... it might turn out that a Joint survivor option on the pension is the best alternative.... but it will reduce the payout. Matter of fact in many states some sort of joint option is probably the default. To change it she might have to sign-off on it.

One thing to consider on life insurance is "good intentions gone bad"! If some unforseen situation arises and the policy lapses or you cannot pay the premium the thing falls apart and your DW is scr3wed!

IMO - Don't try to get too smart... the only lesson you are likely to learn is that you are not smart (no offense). choose a solution that will not fail (very low chance of failure).

In the life insurance world that could mean buying permanent insurance (highly rated company) and seeding it with money (probably alot) and putting her in control of it (owner) so he has control of her situation. Term may not cut it because of longevity and limits on the term.

But you need to get some quotes and run the numbers. You need to factor in your health and longevity. The problem is likely to be that cheap term insurance (assuming you are healthy and insurable) only tend to be sold for 20 or 25 years... sometimes longer (but without a cap/level premium).

If you and your DW decide to take the SL 20 year option... one option might be to buy a longevity annuity for your DW (deferred single premium) for your DW with the start date at the end of 20 years.

You are likely to find out that you are not going to beat the insurance companies at their game.

I am in a similar situation. I intend to choose the joint survivor payout option.
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Old 01-12-2011, 11:56 AM   #3
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You didn't indicate when you planned on dying.

I suspect though, that your options are actuarily equivalent for the average Joe.

Should you win the longlife lottery then you'll come out ahead with the higher payment.

What you really need to do is convert each of the payouts back to a cash equivalent amount given you and the spouses expected lifespan. You'll need to assume some fixed discount rate though going foreward as well as a mortality model.

here's some fun calculators to get you started:

https://www.pensionbenefits.com/calc...sub_item=aecal

https://www.pensionbenefits.com/calc...sub_item=ancal

check out some of their other actuary calculators while you are at it.

This stuff gets complicated fast.

Good luck and lets us know how it turns out.
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Old 01-12-2011, 12:09 PM   #4
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Can your beneficiary be anyone? If you live to be 95 can one of your children instead of your spouse continue to receive the option 2 amount for 20 years?

I agree with concern that the term life insurance might not be available at some point.

I vote option 2 for no real reason.
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Old 01-12-2011, 03:35 PM   #5
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Can your beneficiary be anyone? If you live to be 95 can one of your children instead of your spouse continue to receive the option 2 amount for 20 years?
I'm pretty certain the beneficiaries are anyone I chose, which I like with this option.
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Old 01-12-2011, 03:42 PM   #6
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For your DW... it might turn out that a Joint survivor option on the pension is the best alternative.... but it will reduce the payout. Matter of fact in many states some sort of joint option is probably the default. To change it she might have to sign-off on it.
I looked at the joint survivor options, but the payout is indeed reduced substantially and didn't look very attractive.

Thanks for the input all. Looks like I have more study and research to do!
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Old 01-12-2011, 03:44 PM   #7
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I would be surprised if they didn't adjust the primary and/or beneficiary payment in accordance with the age of the beneficiary. Otherwise the (present) cash value of the benefit changes.
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Old 01-12-2011, 03:52 PM   #8
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I would be surprised if they didn't adjust the primary and/or beneficiary payment in accordance with the age of the beneficiary. Otherwise the (present) cash value of the benefit changes.

I have not seen a lot, but the ones I have seen do adjust to the age... so not a great retirement option...

As someone else mentioned.... you did not put down the payout for life with you and wife... the worse thing is you live 20 years... lapse the life and then die...

I modeled this for my sister and it was slightly better to buy the insurance... but in the end she and BIL thought the hassle of this was not worth the small amount of benefit... to add... I had always said he would die first, but he did not believe it... but he did... and my sisters annuity was adjusted upward since it was not on two people any more...
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Old 01-12-2011, 04:49 PM   #9
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Two questions I would consider---how stable is your pension and how comfortable is DW with managing a portfolio? I would not underestimate the pitfalls of managing a windfall after the loss of spouse.
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Old 01-12-2011, 05:06 PM   #10
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Two questions I would consider---how stable is your pension and how comfortable is DW with managing a portfolio? I would not underestimate the pitfalls of managing a windfall after the loss of spouse.
I struggled with this as well. My pension from MegaMotors is tenuous and my thinking was to get as much as possible now, in case the pension defaults later. Plus, in my case, DW is covered in other ways.
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Old 01-13-2011, 01:22 AM   #11
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I struggled with this as well. My pension from MegaMotors is tenuous and my thinking was to get as much as possible now, in case the pension defaults later. Plus, in my case, DW is covered in other ways.
Well, now that you brought up concerns about the stability of the pension payer...What's the thinking on taking a lump sum payout from MegaHealthCorp instead of the pension annuity and then purchasing an immediate fixed annuity from a more stable financial firm? It is still desirable to have an annuity as part of the overall retirement portfolio for the "guaranteed" income.
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Old 01-13-2011, 08:29 AM   #12
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Well, now that you brought up concerns about the stability of the pension payer...
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What's the thinking on taking a lump sum payout from MegaHealthCorp instead of the pension annuity and then purchasing an immediate fixed annuity from a more stable financial firm? It is still desirable to have an annuity as part of the overall retirement portfolio for the "guaranteed" income.
Good question and one frequently asked here (you can do a search on "SPIA"). I'm not the expert, but key points are to compare your monthly pension amount to the amount that a SPIA would pay on the lump sum payout (you can get quotes on the web). Right now SPIAs are paying a low monthly return due to extremely low interest rates. I guess you could take the lump sum now, invest it in CDs, then annuitize later when interest rate rise.
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Old 01-13-2011, 12:19 PM   #13
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I looked at the joint survivor options, but the payout is indeed reduced substantially and didn't look very attractive.

Thanks for the input all. Looks like I have more study and research to do!
I'd guess the joint payout option monthly benefit "didn't look very attractive" because it provides the possibility of many more years of benefits - exactly in the circumstances where you (really, your wife) would want many more years of benefits. That's pretty important. I would put a joint payout option back on the list.
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Old 01-13-2011, 04:24 PM   #14
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I'd guess the joint payout option monthly benefit "didn't look very attractive" because it provides the possibility of many more years of benefits - exactly in the circumstances where you (really, your wife) would want many more years of benefits. That's pretty important. I would put a joint payout option back on the list.

I would put the joint back on also...

this is from memory, but lets just go with this... a woman lives 7 years long than a man... your wife is 5 years younger than you.. that means on average you are talking about 12 more years of annuity than if it was only you...

You are 60, and I think life expectancy is maybe 20 years or so... so the one annuity is based on 20 years... the other on 32... I can see why the other is 'a lot less'.... but do you want to die and leave your wife without means to support herself? Remember, SS is reduced to one person so you need other funds to make up that money....
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Old 01-13-2011, 04:31 PM   #15
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The health of your pension... you should be able to find that out.

Buying the equivalent annuity from a Triple A rated insurer... get some quotes. Let us know what you found out.
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