Lump Sum pension and GPO

[akck]

In planning for retirement, I've never included spousal SS in any of the calculations, partly because the pension is dependent on how well the investments grow. Another reason is that we plan on taking the pension as a lump sum payment (rollover into an IRA), versus an annuity. From the SSA site:

How much will my Social Security benefits be reduced?

Your Social Security benefits will be reduced by two-thirds of your government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted from your Social Security benefits. For example, if you are eligible for a $500 spouse’s, widow’s or widower’s benefit from Social Security, you will receive $100 per month from Social Security ($500 – $400 = $100).

If you take your government pension annuity in a lump sum, Social Security still will calculate the reduction as if you chose to get monthly benefit payments from your government work.

I've searched the site and haven't found any examples. Does anyone have an idea how they will calculate a lump sum payment into a monthly benefit stream? What ROR do they use? Do they calculate it based on the lump sum at retirement or the IRA value at the time benefits are requested?

This is in the category of "it's nice to know," since planning assumes $0, which it could still be.

[Dreamer]

http://policy.ssa.gov/poms.nsf/lnx/0202608400 Hope this helps.

[Midpack]

No disrespect, but I'm not entirely clear as to what your questions are. If you mean what's the Soc Sec reduction if you take a lump sum, it appears it would be exactly the same as if you took the pension payout. I gather you understand that.

If you're asking what your lump sum would be, I can only answer on what my experience was. You should be able to go Google a few annuity calculator sites, enter the monthly payout, your age, etc. and you would receive and it will calculate the $ required to buy that annuity. Your lump sum amount should be close to that number. But I think most companies will provide a lump sum estimate for you, and give you the rates they use on request.

As far as when calculated, we'd have to know more. Even aside from interest rates, the lump sum could go up (if your monthly benefit still increases with more years working) or down (if you're already at max monthly benefit, more years actually reduces your lump sum) based on when.

Incidentally, if you're comfortable DIY investing this is a good time to take a lump sum vs a monthly payout if you have the choice. The low rates in effect right now make lump sum payouts higher than historically typical (conversely a bad time to buy and annuity, they're expensive at present rates).

Again, not sure I got your question, but thought I'd attempt to answer since no one else has.

[youbet]

Hi akck.....

Good question. There is a lot of misundering about WEP and GPO running around, here on the FIRE board and everywhere else. You seem to have the basics under control and you're smart to see how it will impact you.

As you indicated, the SS folks will not allow a couple to avoid the GPO provision by simply taking a lump sum payout instead of a monthly annuity payment. In my opinion, that's fair. My understanding is that they will calculate a phantom monthly amount based on the lump sum and that 66% of that amount will offset spousal SS payments your wife would have otherwise received based on your earnings.

Your question is how do they calculate the phantom monthly amount. The answer is at the web site that Dreamer pointed to in post #2 above. It's surprisingly clear and to the point for a gov't web site so you shouldn't have any trouble.

After you do the calculating, I'd be interested in knowing how that calculated amount compares to the amount your DW was offered as an annunity. For example, if she had a choice between $100k lump sum and $400/mo annunity, how does the $400/mo compare to what the SS procedure kicked out?

The bottom line is that if your DW's gov't pension is significant, say over $35k/yr (or the lump sum equivalent) or so, she'll get little or no spousal SS based on your earnings due to the GPO. If she did some work under SS and accumulated at least 40 quarters, she'll get SS on her own right but it will be calculated, and likely reduced, using WEP.

[Mulligan]

Youbet, you are certainly correct about the WEP/GPO. That could be a 3 hour college credit course in and of itself! I only have the basic of understanding of it, and any time I try to explain what they are and the reasoning behind it, my friends cant pay attention long enough to understand the entire issue and still think they are getting ripped off.

[akck]

Thanks Dreamer, the link contained what I wanted to know. It looks like she can either provide proof of the amount of the annuity or divide the lump sump by the specified time frame. We would have to provide proof for the first to go that way. There may be some playing that can go on in that they offer several types of annuity payments and one could select the one that provides the smallest payment (due to spousal benefit option).

Midpack, the lump sum is the amount they withhold (employee and employer), plus appreciation. So the annuity would be based on the $ amount in her account at the time she files for benefits. For planning, I add the amount to be contributed and assume no appreciation in order to be conservative. The way we figure it, an annuity is done when we're both dead. The lump sum can be inherited, which we'd like to do even if it means we end up with a smaller income stream than the annuity.

Youbet, we don't have an idea what the lump sum will be, but if it's $80,000, the SS calculation would be about $560 for the annuity. The State site is currently down, but as I recall the annuities ranged from $350 to $550 for the same amount. I'll update it when I can re-run the numbers through their calculator. She doesn't have enough SS credits to file on her own, but that's not a big deal because she's paying into two systems, her PERS account and a Supplemental Benefits System that is in lieu of SS.

[Dreamer]

Your welcome. Glad to have helped.

[akck]

Quote:

Originally Posted by youbet After you do the calculating, I'd be interested in knowing how that calculated amount compares to the amount your DW was offered as an annunity. For example, if she had a choice between $100k lump sum and $400/mo annunity, how does the $400/mo compare to what the SS procedure kicked out?

I was able to get back in to the State's site and run the calculations to compare to the $560 SS estimate for $80,000 lump sum. I was mistaken and the annuities ranged from $305 to a high of $1,389. The high was for 5-year certain payout and the low was for a 100% joint & survivor annuity. The more reasonable range went from $435 down to $305. So it looks like it will pay to printout the annuity options and have the SS use one of them.

For our plan, I've been using something near the bottom of the range being produced by the lump sum. The one difference is that the lump sum will increase annual payouts to go with inflation while the annuities are fixed.

[Midpack]

Quote:

Originally Posted by akck IFor our plan, I've been using something near the bottom of the range being produced by the lump sum. The one difference is that the lump sum will increase annual payouts to go with inflation while the annuities are fixed.

Boy, you lost me there, but that only means I'm of no use on this thread (and my earlier post was worthless).

[akck]

Quote:

Originally Posted by Midpack Boy, you lost me there, but that only means I'm of no use on this thread (and my earlier post was worthless).

Sorry, on re-reading, it is a little confusing. What I was trying to say is that the invested lump sum should produce a growing income stream that will at minimum, keep up with inflation. Compare this to a fixed annuity, which might initially produce a larger income stream, but it will slowly lose to inflation.

[geerman]

I E/R'd after 30 yrs and have a govt pension in monthly payouts. Havn't heard of the SS reduction....Is this a new twist??

[Mulligan]

Quote:

Originally Posted by geerman I E/R'd after 30 yrs and have a govt pension in monthly payouts. Havn't heard of the SS reduction....Is this a new twist??

Just because you have a government pension does not necessarily mean you get SS reduction. Has SS been deducted from your check? If so I imagine you will not have a WEP reduction. For example, I have a government pension also, but I did not contribute to SS. All of my SS contributions have occured through part time jobs and teenage year jobs. Thus the WEP will slash my modest SS benefit. The GPO is another factor that could affect you, or not, but someone else can comment in a clearer concise manner than I could.

[geerman]

Thanks Mulligan...I did pay in over the course of the career and am now paying again in a part time venture. After posting, I checked the SS site and saw that the original question had a couple twists that I wasn't seeing initially. I suspect the whole SS benefit thing may "evolve" a bit, over the next few years and appreciate the insight on this site....

[akck]

Quote:

Originally Posted by akck I was able to get back in to the State's site and run the calculations to compare to the $560 SS estimate for $80,000 lump sum. I was mistaken and the annuities ranged from $305 to a high of $1,389. The high was for 5-year certain payout and the low was for a 100% joint & survivor annuity. The more reasonable range went from $435 down to $305. So it looks like it will pay to printout the annuity options and have the SS use one of them. For our plan, I've been using something near the bottom of the range being produced by the lump sum. The one difference is that the lump sum will increase annual payouts to go with inflation while the annuities are fixed.

UPDATE:

It's been 5 years since I last posted on this thread and an update may be in order since DW retired and we have firmer numbers to base her SS benefit. First, her lump sum amount was about 65% greater than mentioned above, equating to $905/month pension based on the SSA link above. Unfortunately, the State stopped providing an annuity estimate calculator about a year ago, so we can't offer any alternatives to the SSA estimate.

So, what effect did the change in numbers have on our retirement plan? Not much really. Her SS benefit dropped 40% with the larger lump sum size. However, the added income stream produced by the lump sum will be close to offsetting the SS benefit drop. So there will be no net effect on our retirement plan, other than we'll be able to leave a larger inheritance with the larger lump sum.

Once DW takes her SS based on my record, I'll update this thread again to report on if our retirement plan numbers panned out. Hopefully I'll remember in 6 years.