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Level Income option?
Old 09-01-2015, 07:48 PM   #1
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Level Income option?

Is there anyone here that can tell me the pros and cons of taking the Level Income Option for early retirement?

I am 56 now, single, been with the same company for 35 years and can't take it any longer! Here are what my numbers look like if I retire at the end of this year using Level Income option.

My normal monthly retirement check would be $3285.....with Level Income option it would be $4209.


Here is the explanation of Level Income option from my company's website.

Under a Level Income payment method, you can coordinate your pension plan benefit with your Social Security retirement benefit. You will receive a monthly pension payment calculated without regard to Social Security until you reach the Social Security leveling income age associated with the payment method. Once you reach that age, your monthly pension payment is reduced by the maximum Social Security benefit that could have been payable to you at the time you commenced your pension benefit. Your monthly pension payment will be reduced at this age even if you delay commencement of your Social Security benefit until a later date. Payments end upon your death unless your Level Income payment method includes a Joint and Survivor or a Guarantee period that has not yet expired.

Thanks
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Old 09-01-2015, 09:52 PM   #2
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At MegaMotors this was mandatory. I'm past 62 now, delaying until 70. I invested the supplement and live fine on the base payout. DW retires next year and has a choice. I will advise her to not take the supplement to max her lifetime payout.
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Old 09-01-2015, 10:19 PM   #3
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Well what you do depends on the SS check you'll be expecting.....if you expect to get more than the difference between the income options I'd go for the one that won;t be reduced when you get SS.
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Old 09-02-2015, 09:06 AM   #4
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If you believe Megacorp is being fair with you, then it would seem to depend only upon whether you need the "leveling" to survive. It's a bit like the "when to take SS benefits" question. All else being equal, many believe it's better to wait. If taking the leveling option causes you to take SS early - when the leveling option "expires", you lose some flexibility with your SS decision. (eg., you might prefer to wait until 70 - the reasons beyond the scope of this discussion.)

So, do you want/need the option? If so and IF you trust your Megacorp to be fair with you, take it. If you don't need it, personally, I would not take it, but YMMV.
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Old 09-02-2015, 09:44 AM   #5
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Assuming you can delay SS, wouldn't this work well with a non-COLA pension, allowing SS to grow while the level payment 'pays' you to wait?

This doesn't apply to me but it could work for my soon to RE DB.
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Old 09-02-2015, 10:24 AM   #6
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Just as you can for delaying SS you can do a break even calculation for the level income option. In my case, not counting the effects of inflation, if I take the level income option I come out ahead until age 73 after which the fixed single life annuity wins. At one point I did the calculation including the effects of inflation, which push the break even age even further out.

By habit I'm a delayed gratification kind of guy, plan on living into my 80's at least, expect to take SS at 70 and will not opt for the accelerated income option on my pension. That said, the calculation in my case shows (particularly in the presence of any substantial inflation) that the choice is nearly a wash in terms of total income received.
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Old 09-02-2015, 11:19 AM   #7
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Originally Posted by marko View Post
Assuming you can delay SS, wouldn't this work well with a non-COLA pension, allowing SS to grow while the level payment 'pays' you to wait?

This doesn't apply to me but it could work for my soon to RE DB.
The level option only pays out until age 62 regardless of whether you take SS or not.
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Old 09-02-2015, 05:54 PM   #8
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I thought if I took the Level Income option I will receive $4209 for life with never an increase.
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Old 09-02-2015, 06:44 PM   #9
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I thought if I took the Level Income option I will receive $4209 for life with never an increase.
That's not how I interpret the explanation in your first post.

The way I understand it, the first option gives you $3285 pension for life.

If you get the Level Income option, you get $4209 pension until an arbitrary SS eligibility age. Once you reach that age, say your SS benefit is $2000, your pension will be reduced to $2209 ($4209 - $2000) regardless of whether or not you start claiming SS. Imho, Level Income is a bad deal in the long run. Especially so if the set age is 62.
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Old 09-02-2015, 06:56 PM   #10
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That's not how I interpret the explanation in your first post.

The way I understand it, the first option gives you $3285 pension for life.

If you get the Level Income option, you get $4209 pension until an arbitrary SS eligibility age. Once you reach that age, say your SS benefit is $2000, your pension will be reduced to $2209 ($4209 - $2000) regardless of whether or not you start claiming SS. Imho, Level Income is a bad deal in the long run. Especially so if the set age is 62.
This was essentially how it worked at my Megacorp. Megacorp "gave" you more than you "earned" for your pension, BUT then began "taking it back" when you ostensibly elected early SS. So, to Megacorp, it was a wash - they were not being generous, just helping out those who had not yet built up a stash to cover the extra needs prior to SS. The effect was that you had "level" cash coming in before and after SS. YMMV on your plan.
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Old 09-02-2015, 06:59 PM   #11
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Originally Posted by hnzw_rui View Post
That's not how I interpret the explanation in your first post.

The way I understand it, the first option gives you $3285 pension for life.

If you get the Level Income option, you get $4209 pension until an arbitrary SS eligibility age. Once you reach that age, say your SS benefit is $2000, your pension will be reduced to $2209 ($4209 - $2000) regardless of whether or not you start claiming SS. Imho, Level Income is a bad deal in the long run. Especially so if the set age is 62.
Yep, that is how it works at MegaMotors,

From OP's first post:

Quote:
Once you reach that age, your monthly pension payment is reduced by the maximum Social Security benefit that could have been payable to you at the time you commenced your pension benefit. Your monthly pension payment will be reduced at this age even if you delay commencement of your Social Security benefit until a later date.
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Old 09-02-2015, 07:01 PM   #12
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I believe mine is set at 65, I tried to copy and paste the small detailed chart but I would paste on here correctly.


I just don't believe my pension of $3285 per month would be enough and I don't want to tap into my 401K yet.


Thanks for all the replies!
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Old 09-02-2015, 07:44 PM   #13
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Originally Posted by brownred View Post
I believe mine is set at 65, I tried to copy and paste the small detailed chart but I would paste on here correctly.


I just don't believe my pension of $3285 per month would be enough and I don't want to tap into my 401K yet.


Thanks for all the replies!
You have to decide for yourself, but let me give an insight that has worked for me. When I retired, MOST of my stash was in 401(k) or Traditional IRA funds. I INTENTIONALLY have used from these funds to bridge the gap between my modest pension (smaller than yours) and the time I will take SS (at 70). By doing this, my Required Minimum Distributions (all very much taxable) will be lower. IOW, I used this strategy to "manage" my on-going tax situation. If you have carefully considered all the angles (tax paid funds vs "qualified funds", RMDs, Roth conversions, etc.) and have decided that you STILL do not wish to touch your qualified funds, by all means, consider the "leveling" option. That option would not have worked for me (tax-wise), though I DID have the option. I hope this helps and, as always, YMMV.
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Old 09-02-2015, 07:52 PM   #14
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I thought if I took the Level Income option I will receive $4209 for life with never an increase.
That is my understanding also. I'd be a bit hesitant to take it because Social Security provides two important hedges, inflation and longevity especially if you take at 66 and 10 months or even better 70. We are the same age so I'm sure you remember the inflation of the late 70s and early 80s. While there is little evidence we are going to have a return to high inflation, the possibility does exist and large fixed pension would a bad thing to have in a high inflation environment.

It seems worthwhile to run the numbers on various inflation and interest rates, I imagine it will be a close call in most circumstances.

Koolau raises a good point, between ACA subsidies, Roth Conversion and such having a lower income gives a great deal of flexibility.
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Old 09-03-2015, 10:20 AM   #15
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What type of professional person...i.e. Financial Advisor, Financial Planner, would I need to contact about all my options here?
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Old 09-03-2015, 11:03 AM   #16
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Also, I read somewhere that you have to be careful how much money after you retire using Level Income (in the event you decide to go to work after) or you will be penalized as with normal SS.
Anyone heard of this rule?
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Old 09-03-2015, 11:29 AM   #17
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I thought if I took the Level Income option I will receive $4209 for life with never an increase.
You would get $4209 for life but it is the combined pension+SS. Before taking SS, the pension is paying all $4209. When SS kicks in the pension part is reduced by the amount SS is providing.
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Old 09-03-2015, 11:37 AM   #18
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Social security is completely separate from the pension so take that out of the equation.

To make you decision, just do normal calculations like present value and break-even on the cash flow of the two pension options.
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Old 09-03-2015, 12:02 PM   #19
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The amount used in the leveling calculation is almost always a hypothetical SS benefit at some age between age 62 and 67. The benefit consists of two pieces - a permanent life (or J&S) benefit plus a temporary benefit equal to the hypothetical SS benefit to some age between 62 and 67. Lump sum assumptions are used to restructure this benefit from the normal form of payment.


So the OPs paperwork should have two benefits, the pre-SS benefit and the post-SS benefit - the reduction is independent of the actual SS benefit and when it is taken.
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Old 09-03-2015, 04:49 PM   #20
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Also, I read somewhere that you have to be careful how much money after you retire using Level Income (in the event you decide to go to work after) or you will be penalized as with normal SS.
Anyone heard of this rule?
There was no such restriction in my pension and I can't think of a reason there would be one in yours. Why would they care if you worked or not after retiring from that company?

Perhaps this is confusion about the SS reduction if you make over (I think) $15k this year? Over that amount and your SS is reduced by $1 for every $2 over $15k. It is not lost forever though, because when you stop working again your SS benefit is recalculated on your newer earnings and you get a higher benefit.
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