Question about our pension decision:

[kitty_37]

I am a long-time member but don’t post lately. DH has surprised me with an opinion that is not the same as mine. LOL. So I need to consider it, and perhaps you can help. DH is 64 and about to retire. I am 56 and retired 2 years ago after mother’s serious illness. We are both in good health. Some other financial info then our question.

We have approximately 75% of portfolio in retirement funds(403bs, Roth and TIRAs).
We have another 15% in regular savings, and own outright a positive cash flow rental property in Florida. We have a small mortgage. No other debt. We plan to keep the mortgage into retirement as the monthly payment, while high ( LI,NY-high taxes) is still within what we would pay to move or rent. After mom is gone, we will move off Long Island to a cheaper area. We are about 70/30 stock/bond. . SS, pension, and portfolio withdrawls of 3.5% will each provide about a third of our monthly needs.




Question is regarding how to take DH pension. I am younger and will have no pension. We both will have close to maximum SS when we take it at full retirement age or later.
Pension election choices are the common ones(100, 75, 50 or 0% survivor benefit, 60 or 120 month certain). Each option has corresponding lower monthly payments. I have always felt that we should take a 50% survivor benefit- that would be adequate for me if he predeceases me. (My death has no effect on finances for him) .

He would like to take the 0% benefit as it is the maximum monthly amount for now, and instead, to provide income security for me in the event of his early/unexpected death by using increased life insurance or a variable annuity with a death benefit. SS and portfolio alone is not enough for me to stay in our house. I will have a small inheritance, but don’t count that in my planning.

What do you think about life insurance increase or an annuity with death benefit to replace pension income for me? I am not opposed to doing this and am capable of handling a lump sum as I have always handled our finances. But I feel a little more secure with guaranteed pension, even at a small (200 month) reduced payment for now.

What to do? It’s a one time decision and must elect in the next few weeks.
Thanks, maybe someone can suggest options…or critique our situation.



*edited to remove dollar amounts of portfolio value

 

[LOL!]

He must be talking to an insurance agent. I cannot see how one could afford to keep the life insurance in force. It would get so expensive that you would have to stop paying it.

So his idea is to take the difference between 0% and 50% survivor benefit and do something with the money. It should be pretty easy to project how much that difference can buy in life insurance today and in 20, 25, 30 years.

 

[REWahoo]

From a benefit perspective, each of the options - pension survivor benefit, life insurance, or annuity - will get the job done. Cost is where you should see a difference in the three.

If this were my decision, I would compare the cost of each to provide an equal income and select the most economical option. Just a guess, but I think the pension survivor benefit will be the least costly. Both life insurance and an annuity will have commissions and profit baked into the product. That could make a significant difference in what you'll pay to get a benefit equal to the pension survivor option.

Please let us know what you end up choosing and why.

 

[Bestwifeever]

....I have always felt that we should take a 50% survivor benefit- that would be adequate for me if he predeceases me. (My death has no effect on finances for him) .

He would like to take the 0% benefit as it is the maximum monthly amount for now, and instead, to provide income security for me in the event of his early/unexpected death by using increased life insurance or a variable annuity with a death benefit. SS and portfolio alone is not enough for me to stay in our house.I will have a small inheritance, but don’t count that in my planning.

What do you think about life insurance increase or an annuity with death benefit to replace pension income for me? I am not opposed to doing this and am capable of handling a lump sum as I have always handled our finances. ...But I feel a little more secure with guaranteed pension, even at a small (200 month) reduced payment for now.

What to do? It’s a one time decision and must elect in the next few weeks.....

When DH decided how to take his pension, my signature was required for anything other than 100 percent survivor option (which he chose), so you probably are the decision maker in this.

Based on what you have posted, I would vote no. Are the premiums supposed to be paid from the larger pension? Why not just consider the survivor 50 percent pension as an indirect annuity?

Do you know who put this bee in his bonnet?

 

[karluk]

Our family's situation is similar to yours. There is about the same age difference between DW and me, and my pension will be starting next month. I chose the 100% joint survivor option with 180 payments guaranteed. To me it wasn't a close call, even though I picked the option with the lowest monthly payment. I could have been pursuaded to pick a less generous survivor option, but to go 0% would have struck me as completely irresponsible. It is providing absolutely no protection against the single most likely scenario - older man with lower life expectancy predeceasing spouse.

No doubt there are insurance and annuity products available that can mitigate some or all of the risks associated with picking a pension option that doesn't fit your family's needs, but so what? You have a pension option that DOES meet your family's needs right there for the taking. Why look any farther? I'm with lol. It sounds to me as if your DH is listening to some slick-talking salesman with some life insurance or annuity to sell and a monthly sales quota to meet.

When I filled out my pension application, there was a section that required a spouse's signature if a married pension applicant picked a payment option without a survivor benefit. If the laws are similar in NY, you will have to sign DH's paperwork to allow him to pick the 0% option. That gives you veto power over this decision, and I strongly suggest to exercise it. There is no need to go into retirement with any lingering doubt about whether your needs are being adequately provided for.

 

[tightasadrum]

I had a financial advisor recommend that I take the maximum pension and cover DW with life insurance. He said that way I could get the maximum from the pension plan. Duh. But after looking at all the options I felt DW would be covered best with the 100% option. Annuities from a life insurance policy didn't stack up. The only risk is if the pension fund goes broke and I or she would have to fall back on the gov't. insurance program.

With the pension and with future SS I stopped worrying about optimizing to my maximum benefit. Now I try to insure the maximum security of my cash flow, even if it's slightly less. It's just less stress, and the difference is not that great. .

 

[MichaelB]

Lots of good feedback. I would add you should keep in mind what your income need is and see how each proposed option compares with your requirement. The cost of living for one is more than 50% of the cost for a couple, probably more like 2/3 to 3/4, and any option needs to cover that amount beginning on day 1.

 

[kitty_37]

Thanks all, and to those who guessed, yes there has been an annuity salesman in the picture. I am usually very opposed, but wanted to give the idea fair consideration.

To be clear, DH is not planning on leaving me with no plan, just considering something different. Additionally, we have multiple "belts and suspenders" built in to the plans, but I still will put security ahead of most anything else. Will discuss more tonight and will post updates to you nice people. thanks!

 

[heeyy_joe]

Just remember, if you do choose to max out his pension and have you covered with a death benefit on his life that YOU be made the owner of the policy. There are many situations in which pension max/life insurance combo makes a good deal, but it is entirely situation specific.

 

[RetiringAt55]

I am 48 and DH is 57. He has a pension with no survivor benefit for me and instead we are depending on life insurance coverage to protect me. (His exW gets the pension when he passes.) My DH also has a life threatening illness so our future is very uncertain. We plan to retire when I am 55.

We both wish there was a better alternative for us than depending on life insurance. There is really no way to know for sure what the premiums will be in the future. If you have the option, I would definitely recommend that you go with the 50% or higher survivor option on the pension instead of life insurance. It will give you so much more peace of mind.

 

[jeeper]

We elected to decline the survivor option when I took my pension. I thought Life Insurance would be less expensive for us, but the premiums increase with age.

I have been retired for 3 years now, and am now comfortable with living off my pension. The check is auto-deposited and always on time. I wish now that we would have gone with the 50% survivor option. This would have been a more seamless transition for DW, less expensive, and I would not worry as much about solvency.

 

[Original Wally]

As BestWifeEver said, you may have rights. Here in California, we are a Community Property State, and "my" pension belongs 1/2 to my wife. As said, any option leaving her less than 100% upon my death required her sign off. We chose to leave her 100%. We are the same age (she 6 weeks older) so the "cost" to leave 100% to her was a reduction of somewhere around 10% IIRC. Personally, I viewed it as a continuation of my promise to her when we married. There is no way I would have felt "right" with myself leaving her less than 100%. I am just old fashioned, I suppose. OTOH, when she took her modest pension (she was a part time teacher's aide for a number of years) we mutually decided that she should get the maximum and leave me zero. Her pension is only a couple of hunder bucks a month, and I wanted her to have some extra "free money" to do with as she pleases. It is such a personal decision - "right" and "wrong" can and do vary couple by couple. For example, if she had serious health issues and was looking at a seriously shortened life expectancy, that could have changed our decision.

Re the specific question - depending on the pension provider and the liklihood that the provider will be able to fulfull its obligations to you, on balance I would take the pension. If the pension is indexed to inflation with COLA provisions, that is a huge incentive to take the pension option. Generally the internal rate on annuities is not as good as the rates used to calculate pensions.

A frank discussion with DH about YOUR needs, wants and preferences is probably the best thing to do.

 

[youbet]

A frank discussion with DH about YOUR needs, wants and preferences is probably the best thing to do.

You're reading something into OP's situation that isn't there. Her hubby wants to provide support should he predecease her, but is considering options other than taking a 50% or 100% survivor option with his penison to do so.

Given that DH agrees with OP on her desired lifestyle and the required funding to support it after his death (assuming he predeceases her), it really comes down to financial calculations and, likely, some assumptions. Can insurance or an annuity be purchased in an adequate amount with the extra pension funds that would result from a 0% benefit to OP?

I think they need to find a good financial planner or CPA who can do the calculations, explain whatever assumptions that would have to be made, etc., and then make a decision based on the numbers. The annuity salesman that has become part of the decision needs to be set aside.

Likely, IMO, taking the pension with survivor benefits is coming to come out the winner. But, let the numbers do the talking !

 

[sheehs1]

Great thoughtful responses. Only thing I can think to add is there may be situations with life insurance where the company may refuse to pay out such as medical disclosures they may claim were not on the application...etc. They are in the business of investigating ways "not to pay". They may also delay the pay out as they investigate.

Annuity companies also have a history of not only delaying but trying to encourage you to annuitize. All putting time between you and the money due you. Also perhaps a more expensive option for reasons that have been thoroughly discussed on these boards.

Seamless transition....comes to mind at what may be a difficult time.

 

[Original Wally]

Youbet - sometimes it is more than numbers. She has to feel comfortable that it is HER decision as well. Sometimes one half of a couple is looking strictly at the numbers (I tend to be one of those) while the other half is needing something different. I agree that getting the hard numbers is important - and this is a case where a fee based advisor is important - but i think that a discussion of fears/concerns/desires and other issues is also warrented.

 

[kitty_37]

Youbet has the closest take on this- that DH and I BOTH want to make a sensible and safe decision as it can not be revised once elected. But we are in good agreement and just wanted to consider how best to do things. I am usually the leader in our financial life, but I think it was smart of DH to question and consider all options before making an irrevocable decision just on my say-so. He's a sweetie and would never want me to struggle.

Thanks so much all for your help...still have some numbers to run, I guess!

 

[akck]

All I can add is that I ran my numbers and the amount of insurance I could buy would not compensate for the loss of pension. In addition, health benefits would stop upon my death. My wife's pension has health benefits too, but the double coverage will be helpful until we both reach Medicare age. For us I will be choosing 75% (most available), and my wife will choose 50% (hers is smaller).

 

[dmdunca44]

There is another factor in addition to numbers. Imagine an elderly widow beginning to struggle with dementia and losing not only her spouse but his pension as well. Now she has to make a decision about a large sum of money at a time when she is grieving and struggling. A decision that has significant ramifications.

DH and I had a similar decision. He was eyeing the larger monthly amount. Our advisor recommended either the 50% or the 100% survivor option. We chose the 100% survivor option and I cannot express how much peace of mind this has given me.

 

[Katsmeow]

When DH retired I had to sign off on anything other than the 100% survivor option. In his case, he had the option of a lump sum and we elected to do that.

In your situation, given the potential high cost of insurance particularly in later old age, I would probably take the 100% survivor option. I wouldn't take the 50% option particularly if the pension - like most has no COLA. 50% of his pension might be fine now, but if the pension has no COLA - 50% 20 years from now might be very little.

 

[jclarksnakes]

As some others have posted running the numbers is important. I would think that because your DH is older than you that one of the pension survivor benefit options will come out as the better choice. If OTOH you were 10 years older than your DH there would be much less chance that he would predecease you and if it were to happen you could get a much better payout on an annuity, so in that case the insurance and annuity option would likely be the better choice.

 

[ERD50]

I'd be very interested if anyone has run the numbers and found an insurance policy to be a better 'deal' than the survivor options that your company pension offers.

I saw another comment about the age of the spouse - ours (and I assume most others) has adjustments for the spouse's age difference. A young surviving spouse taking survivor benefits will take a relatively bigger bite out of the pension that you get.

I will take a close look when the time comes (another 8 years for me), but I did a quick look, and it seemed obvious to me that my MegaCorp has no interest in making any one offering any better than another - they appear to just be basic life expectancy adjustments. An ins co would do this, and have to make a profit on it. I'd be surprised if a life ins product could be ahead (other than some idea of diversifying the income).

Since my pension is non-COLA, it won't buy much for DW if I pass in my mid-80s. But I also learned that I can delay my pension, just as one can delay SS. You have to call to get current % increases, as they can change each year, but it's another possible piece of the 'longevity ins' puzzle. If the markets do reasonably well in the next 8 years, I might be in a position to delay pension and SS.

-ERD50

 

[Mulligan]

I had a couple of friends a few years back, go the life insurance path. But, I wonder if they had a flawed model to go by. They bought in terms of "this will be plenty of money to get by on" and an insurance person provided them the numbers. This pension plan is COLA'd too, so I question if that was factored in also. I went option 1 on my plan, being single, but I was tempted to take an approx. 300-400 cut to fund option 3 of 50% for my daughter who is still under 20. If I had died the day after I retired she could have immediately drawn a little under 38k with COLA for rest of her life.
But I decided against it as I plan on living a long time, and would miss out on the COLA gain from the lost money, and need to save more myself.
I am conservative by nature, but provided the pension is secure, I would take the seamless transition of the pension, and skip the stress of insurance issues, drawn down investment decisions, etc.

 

[obgyn65]

Although I have a lot of respect for many posters here, this situation may be more complex than it would appear. It would advise you to consult a financial advisor with your husband.

 

[ERD50]

Although I have a lot of respect for many posters here, this situation may be more complex than it would appear. It would advise you to consult a financial advisor with your husband.

What complexities do you envision?

It's pretty straightforward to compare the cost of Life Insurance versus the reduction in the pension benefit for each level of survivor benefit. I'm also assuming (if not already mentioned) that the pension is non-COLA'd. That makes apples-apples with LI easier.

Assuming you compare to a solid rated ins co, I doubt an advisor could tell you anything useful regarding the relative security of a PBGC secured pension versus the ins co. Is there anything other than some straight arithmetic and some comparison quotes? That's what I plan to do when I get to that point. I'm having trouble picturing what I would ask or expect from any advisor.

And then we are always back to that chicken-egg issue when it comes to advisors. How do you know if the advisor knows what they are talking about?

-ERD50

 

[jclarksnakes]

What complexities do you envision?

It's pretty straightforward to compare the cost of Life Insurance versus the reduction in the pension benefit for each level of survivor benefit. I'm also assuming (if not already mentioned) that the pension is non-COLA'd. That makes apples-apples with LI easier.

Assuming you compare to a solid rated ins co, I doubt an advisor could tell you anything useful regarding the relative security of a PBGC secured pension versus the ins co. Is there anything other than some straight arithmetic and some comparison quotes? That's what I plan to do when I get to that point. I'm having trouble picturing what I would ask or expect from any advisor.

And then we are always back to that chicken-egg issue when it comes to advisors. How do you know if the advisor knows what they are talking about?

-ERD50

+1. It seems to me that many of the folks posting here are sharper than many professional financial advisors.