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Survivor benefit. Or not?
Old 02-27-2015, 05:55 PM   #1
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Survivor benefit. Or not?

Looking at getting FIRED from my teaching job of 36 years. Is that really early?! The question is whether to take a survivor benefit on my Washington State pension. My wife and I are both 59, she is in good health - I'm struggling with A-fib but hope to hang in there for a long time. The reality is ....who knows?
The pension will be $1900 a month. To take the full survivor benefit the total will drop to $1600 a month. We have $1.2 million saved and own $1 million of real estate between two properties.
I was quoted a 20 year level term life policy of $100,000 for $130 per month.

If I go early the wife will have a decent asset base to live off of, but the income from my pension would not fly out the window if we took the survivor benefit.

Your thoughts?


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Old 02-27-2015, 06:05 PM   #2
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Fundamentally, you have two independent questions:
1) If you predecease your wife, how important is it to replace that $1900/mo in income? This will involve several factors only you guys can answer: Expected income from your investments (Firecalc can help with this), pensions she may have, SS income, and expected spending (incl how it changes if you are deceased). Probably best to get out a spreadsheet and go year-by-year to see how things change as the income streams come online.
2) If the answer to the above is "yes, replacing the $1900 per month would be important", then you need to figure out if buying the survivor benefit from your pension plan is the best way to do it (cheapest, most secure, etc).

Question 1: What's the requirement? Question 2: What are the ways of meeting the requirement? Then you just need to ID the best one, and assure the cost of that best one is worth paying to meet the requirement IDed in Question 1.

We had a long recent thread on this, I'll find it . . .
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Old 02-27-2015, 06:08 PM   #3
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Thanks, Jigger, for raising this and thanks for searching, samclem. I'm facing a similar decision but the amounts are smaller. I'm looking at only about an 8-9% reduction on a smaller amount.
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Old 02-27-2015, 06:16 PM   #4
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I retired Aug.1st last year and DH will retire June1st 2016 with a pension (30% of salary). He also has an heart issue (has a defibrillator implant). We are the same age and he plans to opt for survivor benefit even though it knocks pension down 10%. We won't have any debts, own our home and have about $2m in investments. I don't have a pension.
So I agree with your plan.


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Old 02-27-2015, 06:22 PM   #5
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Quote:
Originally Posted by samclem View Post
We had a long recent thread on this, I'll find it . . .
Well, not as detailed as I thought it was, but some good input is here.

If you guys decide that she'd need to replace that $1900/mo, be sure to examine each option closely. If the pension is COLA'd, it can be tricky to replace it with an insurance policy. If she delays SS can go some way toward improving the COLA'd monthly cash flow. Etc.

A "regular" life insurance policy covering you would pay whether you or she were to die first. You really only need the insurance payout if you die first. Right there, it looks like you may be insuring against a risk you don't care about. I'd assume the survivor benefit "premiums" associated with your pension might be cheaper for that reason, if the coverage and "overhead" are the same: You're insuring against a less likely event.
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Old 02-27-2015, 06:27 PM   #6
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We took the survivor benefit, because I don't have a pension. Also, by taking it, I can keep the health insurance expense covered and lots of other expenses too. It is about 10% less, but I I for first, his pension will go back to the full amount.


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Old 02-27-2015, 06:36 PM   #7
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I had this decision to make when I retired. When I looked at the cost of a policy that would be large enough to replace the pension income and be guaranteed to be there no matter how long I lived it was much more than the difference in the two pension payouts. I chose to go with the 100% survivor benefit. In your example $100,000 does not replace a $1900 a month pension payout for very long and what if you live 21 years? The insurance is no longer there and your wife is left without the pension or insurance.
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Old 02-27-2015, 06:37 PM   #8
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Yes.
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Old 02-27-2015, 07:03 PM   #9
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For consideration:
1) In 20 years of moderate 3% inflation, that $100K life insurance payout will only be worth $55K of today's dollars. With monthly withdrawals of $1900 (in today's dollars), it would last only 2.5 years. Not very good. To make the money last, say, 30 years, you'd need to use approx the same 4% annual withdrawal rate we talk about on this board a lot, so you'd need about 10 times this much life insurance. Given that, your expected premium (using the $130/mo quote you were quoted) would be $1300. Using this, we can see it's a lot cheaper to pay the $300 for the survivor's benefit.

And, in the above case your wife is left with zero if you bought the insurance and died after 20 years. So the survivor coverage is an even better deal, in comparison.

If you need it at all. We're jumping ahead. You'd still need to go back to "Question 1" and see if it is important for you guys. Then (if "yes") you need to look at all the alternatives to meet the requirement.
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Old 02-27-2015, 07:29 PM   #10
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Thank you for the input! This certainly gives us something to chew on.


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Old 02-27-2015, 11:59 PM   #11
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Might be different in your State, but in ours, the spouse who is giving up on 100% survivor benefit has to agree.
Because its too easy for some folks to not see the danger, and only see the extra ~$200/mo cash, and really screw the survivor spouse.

We went with the survivor benefit.
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Old 02-28-2015, 09:48 AM   #12
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Having the survivor benefit is what allows us to retire early. We know that if either of us is left alone, we can easily live on the pension and our social security, with our savings as backup. We don't have millions in savings like some of you have, so having the survivor benefit gives us peace of mind.


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Old 02-28-2015, 12:21 PM   #13
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Just adding few more numbers -

Assuming the pension is not inflation adjusted, a fixed annuity that provides a level $1,600/month to a 59 yo female costs about $348,000.

Move the age up to 69, and the cost is $283,000.
Move the age up to 79, and the cost is $195,000.

In theory, you could ladder term policies - a 30 year policy for $195k, a 20 year for $88k, and a 10 year for $65k. I expect that will cost more than $300 per month.
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Old 02-28-2015, 12:42 PM   #14
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Thanks to all for the input. The Boss says 100% survivor benefit - so that will be it. Now I'm looking into a food taster, removing all knives from the house, and not walking close to the edge of any canyon we might hike. Seems prudent, no? (-;


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Old 02-28-2015, 12:55 PM   #15
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Quote:
Originally Posted by Jigger View Post
Thanks to all for the input. The Boss says 100% survivor benefit - so that will be it. Now I'm looking into a food taster, removing all knives from the house, and not walking close to the edge of any canyon we might hike. Seems prudent, no? (-;


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I have several friends with pensions and wives. Not one of them would entertain the idea of not taking survivor benefits. Jiggar, just don't add a multi million dollar insurance policy and you probably can live the rest of your life out in relative safety.


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Old 02-28-2015, 02:23 PM   #16
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I also took a survivor's benefit, a no-brainer since DW's benefits would be sustenance level. Doing that was also about a 10% hit on the pension but I forget exactly - I didn't give the idea of not taking it much thought. The COLA'd pension drops 30% if I go first (which is likely given that I'm 6 years older than DW and I also recently began dealing with Afib). I retired at 52 and the pension dropped at 62 by the amount of SS that I would have received then based on my work record at age 52. By delaying SS until age 66 next year I will make up for a big chunk of that 30% drop in pension. If I drop next week there is more than enough in savings/investments to maintain things until she is 66 and can receive my full SS benefit.
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Old 02-28-2015, 02:33 PM   #17
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Might be different in your State, but in ours, the spouse who is giving up on 100% survivor benefit has to agree.
Because its too easy for some folks to not see the danger, and only see the extra ~$200/mo cash, and really screw the survivor spouse.
That's almost universal now. My step-grandma was widowed in the 1970s and that's when she found her late husband's pension had no survivor benefit. It's one reason she ended up married to my Grandpa (also widowed)- her adult kids told her she couldn't afford to live on her SS widow's benefit so she went looking for a husband.

I had a $10K/year pension that started at age 60 and DH had to sign off because we selected a survivor benefit of only 50% rather than 75%. Since he's 15 years older, the impact to my pension was tiny.
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Old 02-28-2015, 02:49 PM   #18
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I am an outlier it seems. DW is entitled to a $1540/month pension which drops to $1330 if we want 100% survivor benefits. I'm willing to gamble I die first (most likely as the male even though we are essentially the same age).

If DW died first, I'm pretty sure my expenses would drop more than her pension loss (I'm more frugal and would do a lot less travelling). If it were my pension I would have a different take, but I only have "alphabet" plans: 401a, 453b, 457, rIRA, and tIRA investments that will support her when I die.
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Old 02-28-2015, 02:59 PM   #19
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I lost 15% on two of my pensions and 23% on the third. I did 100% continuation is the presumption she will outlive me. Like the OP the difference is relatively small and should not have a meaningful impact whichever way we went. I went with the 100% because I didn't want DW second guessing anything for a trivial amount of money.
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Old 02-28-2015, 09:20 PM   #20
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DH and I are both retired teachers. We both went with total survivor benefit, simply because DH retired first and was adamant that he would do it no other way. (He is a really nice human.)


I would have felt like a jerk to do otherwise.


We do not have the savings you have, but I am comfortable with it.
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