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pension options
Old 02-17-2014, 10:08 AM   #1
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pension options

Looking at my pension, I have a choice to make concerning the payment options. The single life annuity option pays $500/month for the rest of my life, nothing for the wife if I die. 10 year certain and life pays $470/month (I think that's $470/month as long as I live, but nothing for my wife if I die after 10 years), 20 year certain and life pays $420/month, and $850/month for 10 years regardless of date of death.

My current spreadsheet has budgeted +/- $500/month from this pension(no big difference if it's $420 or $500). It is a non-COLA pension.

I am thinking about taking the $850/month. If I took that amount, utilized the $500/month, I could divert the extra $350/month into an IRA, escaping taxes and allowing the money to grow. After 10 years, I will have invested $42k, and without any growth, enough to fund the $500 hole for another 7 years, with some growth, even more. Since there's no cola involved, the investments may make up the inflation protection.

I will be 60 in September when the pension is claimed, and have a current life expectancy of 83.

I'd appreciate any thoughts/ideas/variations. I am new to this annuity thing.
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Old 02-17-2014, 11:38 AM   #2
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I wonder what a $850/mo SPIA would cost for a 70 YO male. You could check at Immediate Annuity.com or at Vanguard. I suspect it is much more than $42K. If you got 5% return, you'd have $54K which still wouldn't get you there.

How important is this nominal $4-10K/yr to your retirement budget? How does your wife feel about losing this income stream? I suspect that she'll be much happier knowing that you cared enough for her after your death to include her in the choice. I also suspect that the difference in money isn't worth worrying about.
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Old 02-17-2014, 11:54 AM   #3
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Looking at my pension, I have a choice to make concerning the payment options. The single life annuity option pays $500/month for the rest of my life, nothing for the wife if I die. 10 year certain and life pays $470/month (I think that's $470/month as long as I live, but nothing for my wife if I die after 10 years), 20 year certain and life pays $420/month, and $850/month for 10 years regardless of date of death.

My current spreadsheet has budgeted +/- $500/month from this pension(no big difference if it's $420 or $500). It is a non-COLA pension.

I am thinking about taking the $850/month. If I took that amount, utilized the $500/month, I could divert the extra $350/month into an IRA, escaping taxes and allowing the money to grow. After 10 years, I will have invested $42k, and without any growth, enough to fund the $500 hole for another 7 years, with some growth, even more. Since there's no cola involved, the investments may make up the inflation protection.

I will be 60 in September when the pension is claimed, and have a current life expectancy of 83.

I'd appreciate any thoughts/ideas/variations. I am new to this annuity thing.
Is this a decision you and your wife will be making together? In my experience, employers are legally required to obtain the spouse's agreement in writing for whichever annuity (or lump sum) option is selected by the employee. My employer certainly requires this.
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Old 02-17-2014, 11:56 AM   #4
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Will you still be working? You can only add the money to an IRA if you have earned income for that year. Would you invest the money in stocks/funds? What if the market tanks?
I agree that you need to get your wife involved in the decision for this. Even though my wife will have her own pension that is higher than mine, she wanted the comfort of keeping 50 percent of mine after I'm gone, and she will do the same for me.
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Old 02-17-2014, 12:15 PM   #5
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Wife is on board with any decision I make-this is not a major impact over the bigger picture unless stocks tank tremendously.
I plan on "retiring" from my job in Oct., am hoping to pick up an odd job or 2 to get some earned income. If not, maybe I can just stash the extra in a regular account.
another option would be to save the $350/month for 2 years, then use that to offset the cost of delaying SS for an additional year, claiming SS at 63 rather than 62. That would give me an $18600 revenue stream for that year ($850 X 12 + $8400 saved) to offset the additional delay.

Whatever we do, her consent is required from my employer.
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Old 02-17-2014, 01:04 PM   #6
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another option would be to save the $350/month for 2 years, then use that to offset the cost of delaying SS for an additional year, claiming SS at 63 rather than 62. That would give me an $18600 revenue stream for that year ($850 X 12 + $8400 saved) to offset the additional delay.
A much bigger question is when to claim SS. The financial literature generally says that for healthy, married couples it pays to delay SS to age 70 if financially able. There are many threads here discussing this.
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