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Opinions on Pension Options
Old 11-28-2014, 08:59 PM   #1
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Opinions on Pension Options

Unless early out package is presented, I plan to hang it up 01/2016 when I turn 62.
We have multiple pension options of which I am interested in several.
At 62:

Single Life Annuity 4955/mo
Joint & Survivor 4271/mo
Lump Sum of 544,170 plus 1,562/mo Joint and Survivor

Would you take the SLA and purchase a 500,000 20 yr term life insurance policy for about 300/mo and come out about 350/mo to the good? Lump sum is tempting, but I am leaning toward the SLA option over the J & S option.
We have ample assets otherwise (>1.5mm), wife gets 1800/mo teachers ret. in a few years and I can begin SS payments at any time after 01/2016.

As always, your opinions and advice is greatly appreciated.
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Old 11-28-2014, 09:06 PM   #2
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You can use immediateannuities.com to evaluate how the options compare to current annuity pricing.
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Old 11-28-2014, 09:39 PM   #3
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Given your level of assets I don't see a need for "term life insurance".
I'm also interested why a couple would go with a single life over a joint life
policy.

Assuming your wife is the same age as you and that the $544k buys the difference between your options 2) and 3) it is worth $2709/month. This is a payout rate of 6% and an interest rate of about 3.7%....these are better than you'd get from insurance companies today, but still not good. With interest rates low it's a good time to take a buy out so I'd be tempted to take option 3), the lump sum and smaller joint annuity and just invest the lump sum.

Of course your need for income and risk tolerance also play into this and you need to be comfortable the sources of your income. With Option 3 will you have enough from pensions and SS to sleep well at night?
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Old 11-29-2014, 07:13 AM   #4
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If you take the 544K + the $1,562, it is the same as taking the Joint & Survivor @ 4271/mo for 16.73 years with a 0% return. You will be almost 79 years old when it is gone. If you get a 5.9% return, you will never use the principle. Anything between 0 and 5.9% will make the 16.73 years longer.

How healthy are you/wife? How much older/younger are you than your wife? Can you take the $544K and use it wisely over 16+ years? Or will you blow it? How will you invest it if you do a self managed ?

How much do you actually need to live? Or where will the money come from if you blow the $544K?

SS will kick in soon, and your other assets might cover some expenses.

I would take the $544K and invest it in a long term asset that returns 3%+ and take my chances. But it has to be a set it and forget it venture.
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Old 11-29-2014, 07:34 AM   #5
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Lump sum.
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Old 11-29-2014, 07:44 AM   #6
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Does your pension have COLA?
Does your wife's?
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Old 11-29-2014, 07:49 AM   #7
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Totally option 3.
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Old 11-29-2014, 09:04 AM   #8
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Pension not COLA'd. Wife's is. We are in very good health. She is 57.
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Old 11-29-2014, 10:07 AM   #9
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Quote:
Originally Posted by sheldon cornped View Post
Pension not COLA'd. Wife's is. We are in very good health. She is 57.
Using those numbers in "Immdeiateannuities" you'd get a monthly joint income of $2439 for $544k, so the $2709 implied by the difference between options 2) and 3) is better than the current market and the interest rate is 3.8%.

Your decision comes down to what makes you most comfortable and how the various annuity options fit into your plans and other investments. If you take option 2) you could be more aggressive with the rest of your portfolio. If you take the lump sum will you be able to get better than 3.8% return at the same risk? Is 3.8% guaranteed return from the pension over 21 years (assuming you live your predicted lifespan) ok with you?
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Old 11-30-2014, 02:24 AM   #10
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At 60 for me.


Single Life Annuity 3740/mo

Joint & Survivor 3100mo

Lump Sum $675,000

I have no good choice I am taking the lump sum. I am 53 and it grow 24-30k year until 60. From 450 to 670
I have no cola, wife teacher has cola with her pension


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Old 11-30-2014, 06:44 AM   #11
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my opinion...
If you can manage money, then take the lump sum. If not, then choose J&S option.
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Old 11-30-2014, 08:58 AM   #12
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Quote:
Originally Posted by Terryjm51 View Post
At 60 for me.


Single Life Annuity 3740/mo

Joint & Survivor 3100mo

Lump Sum $675,000

I have no good choice I am taking the lump sum. I am 53 and it grow 24-30k year until 60. From 450 to 670
I have no cola, wife teacher has cola with her pension


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Well the the single life has a interest rate of 3.8%, just like many of these pensions, and without a COLA inflation could really reduce it's value further.
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Old 11-30-2014, 01:54 PM   #13
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Lump sum.
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Old 11-30-2014, 08:07 PM   #14
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The difference between your $4,955 SLA benefit and the $4,271 J&S benefit would be $684 a month so if you can buy life insurance coverage that will provide a death benefit sufficient to buy an annuity that pays a benefit of $4,271 for the rest of her life for less than $684 a month then it might be a good play.

According to immediateannuities.com the $500k of life insurance benefits your are considering would only buy a monthly annuity benefit of $2,450 (assuming she is 62 as well), so to have insurance sufficient to buy an annuity with a $4,271 benefit for DW you would need to have ~$870k of insurance.

If you could create a ladder of different term life policies to reduce the cost below $684/month and still provide a benefit sufficient to provide $4,271/month of replacement income should you pass before her then it would be a viable strategy.

See Creating a Life Insurance Ladder
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Old 11-30-2014, 08:21 PM   #15
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Quote:
Originally Posted by pb4uski View Post
The difference between your $4,955 SLA benefit and the $4,271 J&S benefit would be $684 a month so if you can buy life insurance coverage that will provide a death benefit sufficient to buy an annuity that pays a benefit of $4,271 for the rest of her life for less than $684 a month then it might be a good play.

According to immediateannuities.com the $500k of life insurance benefits your are considering would only buy a monthly annuity benefit of $2,450 (assuming she is 62 as well), so to have insurance sufficient to buy an annuity with a $4,271 benefit for DW you would need to have ~$870k of insurance.

If you could create a ladder of different term life policies to reduce the cost below $684/month and still provide a benefit sufficient to provide $4,271/month of replacement income should you pass before her then it would be a viable strategy.

See Creating a Life Insurance Ladder
The difficulty I have with both of the higher annuity options is locking up so much money forever at a 3.8% interest rate. I like annuities, but unless you have access to something significantly better than today's market they are hard to justify. Also the lump sum payment will be inflated by today's low interest rates, so now is a good time to take the lump sum.
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Old 11-30-2014, 08:43 PM   #16
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How are you getting 3.8%? It's a life contingent annuity, not a period certain annuity.
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Old 11-30-2014, 09:49 PM   #17
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Quote:
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How are you getting 3.8%? It's a life contingent annuity, not a period certain annuity.
Just assuming longevity from mortality tables....so I should have said "locking in 3.8% if both parties live life spans predicted by the life expectancy tables", obviously the performance of the annuity will depend on the age when they expire.
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Old 12-01-2014, 08:48 AM   #18
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Old 12-01-2014, 09:33 AM   #19
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Just assuming longevity from mortality tables....so I should have said "locking in 3.8% if both parties live life spans predicted by the life expectancy tables", obviously the performance of the annuity will depend on the age when they expire.
You could probably say that about any life contingent annuity - the implicit interest rate is low. 3.8% would be ~100 bps better than the 30 year treasury.
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Old 12-01-2014, 09:51 AM   #20
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You could probably say that about any life contingent annuity - the implicit interest rate is low. 3.8% would be ~100 bps better than the 30 year treasury.
Yes. I imagine the lump sum is calculated using the IRS segmented rates.

Minimum Present Value Segment Rates

Low "interest rates" make it a good time to take the lump sum rather than the income.
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