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Is life-only pension OK in my circumstance?
Old 12-22-2015, 05:45 PM   #1
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Is life-only pension OK in my circumstance?

I am trying to decide if I have applied the correct logic to my husbandís pension choices. We have selected the life-only benefit option. We have until the end of January to make any changes to that selection; after that, it is set in stone. I will not be receiving a pension myself.
My husband is 58. I am 53. Shortly after we were married 11 years ago, we hoped to quit our jobs in 2015, when my husband had the opportunity to take an early pension. Our goal was met and surpassed (thank you markets), and effective November 30, 2015 we quit.
Since we are retiring early, obviously we will have a longer time-horizon, and also a longer wait for Social Security income (especially me), so my thought was that if we could maximize the pension: 1) we could avoid having to withdraw as much from our investments early in retirement, letting them continue to grow, 2) lessen any sequence risk (for the same reason), and 3) have more purchasing power with the pension money early on, because itís NOT indexed to inflation.
The thing going for us is that we are good savers (particularly me), having started early and continued during low markets, so our nest egg is ~48 times our last two yearsí actual expenses, adjusting for lower income tax and adding in for health insurance premiums.
I used FireCalc to plug in various what-if scenarios, including the possibility that my husband died the day after he started taking his life-only pension. I reduced the value of our qualified accounts (which are ~50% of the total portfolio) by the expected Fed and CA state taxes. I used a 50-year time horizon. I further took an additional 20% off the grand total to assume for a market correction at the beginning of retirement and said Iíd take out a lump sum $100,000 in 2018. I indicated that my Social Security income would start at age 62 (hopefully SS will still be there then!). FireCalc said there was a 100% chance of success that my money would last 50 years, even without a pension. In fact, I could take out more money than we spent on average the last two years, which is good because we plan on doing extensive travel. This calculation was based on using a 50/50 asset allocation in retirement.
Particulars:
Portfolio: $2,800,000
50% of the portfolio is in after tax accounts, so no problem with access to money before age 59 Ĺ
Emergency Fund: $100,000+
Expenses: ~$60,000/year + traveling costs (includes fixed and estimated taxes - ~70%, and discretionary expenses)
Life-only pension: $45,114/yr (we chose the option to increase the benefit to $48,120/yr until 62, then $44,520)
Survivor option 1: $39,114/yr, survivor: $26,088 (2/3)
Survivor option 2: $38,616/yr, survivor: $28,962 (3/4)
Current asset allocation is 62% stocks/38% bonds & cash
Stock portfolio is currently 60% domestic stocks, 28% international, & 12% REITs
Portfolio made up of virtually all mutual funds, 92% of which are index funds.
House paid off, no other debt
No kids, so no big need to provide for a legacy
I would expect an average life expectancy for both of us. We are both healthy and extremely fit.

Anything else I should be considering that might change my mind?

Thank you!
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Old 12-22-2015, 06:05 PM   #2
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We were in a somewhat similar situation. My husband is eight years older than I am. He retired at 64. We chose the 75% joint and survivor option for his pension. I am likely to outlive him, and should I do so, I will have 75% of his pension plus all of his Social Security, which he will take at age 70. This will more than cover basic expenses. Should he outlive me, he will have all of his pension plus all of his Social Security. Our investments will be reserved for inflation (his pension is not inflation-adjusted) and for large unanticipated expenses, like medical (though we do have long-term care insurance.)


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Old 12-22-2015, 06:11 PM   #3
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At age 62 I chose the 100% option. My spouse is 7 years younger than I. Pension currently covers about 50% of our spending. Took about a 9% discount to go from. 66.7% to 100%. Just seemed like the right decision from a relationship point of view.
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Is life-only pension OK in my circumstance?
Old 12-22-2015, 06:15 PM   #4
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Is life-only pension OK in my circumstance?

I choose 100% survivor pension. The difference is minuscule to me, less than $100 a month, I don't remember exactly. But I think you should get something for the survivor. But I think you should be ok, financial wise.
Originally I was going to do single life, because I'm younger and healthier but then I decided it doesn't make a difference money wise, well not too much, I think my husband seems happier with this choice, even though he was ok with the single choice. But I have a very small pension. I probably get about $12k a year, plus and minus a few dollars.


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Old 12-22-2015, 06:29 PM   #5
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You're both healthy and fit and people of means typically live longer. Given your age, I would lean towards the 3/4 joint life option.

One benefit is that the lower pension will allow you to do more Roth conversions at low tax rates between ER and 70 to avoid the tax torpedo once SS and RMDs begin.

However, the reality is that you have enough of a nestegg that either decision will probably be fine.
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Old 12-22-2015, 08:09 PM   #6
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I agree that either option will probably be ok, but personally I'd choose the 3/4 survivor option. Losing a husband is an emotionally draining situation, it's not a time that I'd like to lose a significant part of the ongoing income.

It sounds like it won't make a big difference to your current lifestyle, and it may end up with a significant benefit.
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Old 12-22-2015, 08:27 PM   #7
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I would go the 3/4 option. For me it's like insurance. There are lots of post on here from folks that worry about their stash surviving. The survivors benefit is a guarantee. Military retirees have a similar choice. We chose 100%. We don't miss the current income, but I sleep better knowing that DW will have the income.
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Old 12-22-2015, 10:50 PM   #8
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It looks like you are in good shape no matter what you do. That said, statistically women live longer and you are younger, which kind of says to not do a single life pension, but a survivor pension.
You say that you are taking the pension right away because it does not have a cola, but delaying it could increase the annual payout. Same considerations go with SS.
If the tax preference accounts are not roths, then consider small roth conversions. If you keep most distributions as LTCG and Q-divy, you can keep the taxes low. I doubt you can drop your RMDs low enough to make SS not taxable. But you may be able to lower your RMD taxes with some early conversions. If you are planning to get a subsidy for HC, then you may need to restrict conversions.

Best of luck..
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Old 12-22-2015, 11:06 PM   #9
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Originally Posted by pb4uski View Post
You're both healthy and fit and people of means typically live longer. Given your age, I would lean towards the 3/4 joint life option.

One benefit is that the lower pension will allow you to do more Roth conversions at low tax rates between ER and 70 to avoid the tax torpedo once SS and RMDs begin......
+1
Statistically you will have about 10 yrs or more of survivor benefits, that is a big chunk to toss away.
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Old 12-22-2015, 11:55 PM   #10
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Originally Posted by FreedomSeeker View Post
my thought was that if we could maximize the pension: 1) we could avoid having to withdraw as much from our investments early in retirement, letting them continue to grow, 2) lessen any sequence risk (for the same reason), and 3) have more purchasing power with the pension money early on, because itís NOT indexed to inflation.

Thank you!
I like your choice and I like your reasoning.

Because of your good fortune to be retiring early (fantastic!), inflation over the subsequent decades could be a very real issue, especially with a non-cola'd pension.

Because (1) you seem to be more than able to handle managing your FIRE portfolio and (2) you have adequate resources to overcome the financial risk of your husband passing early in retirement, I'd stick with your plan.
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Old 12-23-2015, 07:20 AM   #11
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Quote:
Originally Posted by pb4uski View Post
You're both healthy and fit and people of means typically live longer. Given your age, I would lean towards the 3/4 joint life option. One benefit is that the lower pension will allow you to do more Roth conversions at low tax rates between ER and 70 to avoid the tax torpedo once SS and RMDs begin. However, the reality is that you have enough of a nestegg that either decision will probably be fine.
I concur with pb4uski. Definitely go with a joint survivor option.
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Old 12-23-2015, 09:28 AM   #12
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personal choice but it appears the SSL is a bit subsidized


any idea what conversion factors were used to calculate the J&S benefits? It should be in your packet.
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Old 12-23-2015, 09:34 AM   #13
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One alternative nobody has mentioned is to take the 100%, and buy a term life policy to make up the difference.
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Old 12-23-2015, 10:09 AM   #14
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$6000/mo is the premium you would pay to get some pension? If you both live a normal life, he will die around 80 and you around 82, so you are paying that $6000 for 24 years, and then you will receive $26,088 for 7 years, ergo cost is 6000 x 12 x 24 and the benefit is 7 x 12 x 26088. IOW $1.728 million cost of insurance for a potential payout of $2.192 million in 24 years.

I think you are making the right financial decision to take the $45114 option.
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Old 12-23-2015, 10:12 AM   #15
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Problem is, very few people die exactly on their life expectancy.

The way the annuity conversions are calculated, a little piece of you dies each year until you are 100% dead. So what we should be looking at is a mathematical expectation (using an interest and mortality assumption) of the payouts over an individual lifetime versus a joint lifetime, not a certain annuity calculation.

Someone had posted a link to a thread where this type of calculation was done, not sure where it is though.
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Old 12-23-2015, 10:32 AM   #16
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One alternative nobody has mentioned is to take the 100%, and buy a term life policy to make up the difference.
I looked into that for me a while ago and the numbers didn't make sense. YMMV.
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Old 12-23-2015, 10:39 AM   #17
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Agreed - it's difficult to make up for qualified plan benefits by going retail - whether it's term life, IRA fees, or general risk pooling
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Old 12-23-2015, 02:36 PM   #18
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I agree with most that the circumstances would favor the largest survivor benefit. However, the cost of that benefit in this case seems very steep. I'd run the numbers in a spreadsheet or a calculator to see the trade-offs. It looks like you are fine even without the pension, so this is not a critical choice. I wouldn't complain if you decided to take the single life and use it as travel money for as long as it lasts.
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Old 12-23-2015, 04:10 PM   #19
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I would also vote for the 3/4 survivor benefit but maybe that is because I survived the perfect storm . My husband died two years into retirement and then I retired in 2008 and lost almost 40% of my portfolio . That survivor benefit kept me from depleting my portfolio even further .
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Old 12-23-2015, 04:56 PM   #20
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$6000/mo is the premium you would pay to get some pension? If you both live a normal life, he will die around 80 and you around 82, so you are paying that $6000 for 24 years, and then you will receive $26,088 for 7 years, ergo cost is 6000 x 12 x 24 and the benefit is 7 x 12 x 26088. IOW $1.728 million cost of insurance for a potential payout of $2.192 million in 24 years.

I think you are making the right financial decision to take the $45114 option.
I think the math is wrong, as the cost difference is approx $6,000/YR not per month.

full benefit: 45,114/yr vs 38,616/yr (for 3/4 suvivor benefit of 28,962/yr)
Cost of 6,498 per year by taking less to get the 3/4 survivorship clause.
Assume above normal lifespans.
So cost is 6,498 x 24 yrs = $155,952
Benefit for 7 yrs is 28,962 * 7 = $202,734

So taking the 3/4 survivor wins if you both live normal expected life spans and it wins even more (like insurance) if your husband dies early.
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