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When is it smart to take your full pension with no survivor option?
Old 06-11-2012, 09:41 AM   #1
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When is it smart to take your full pension with no survivor option?

My husband has to make this decision in a few days, as he is retiring by the end of this month. If he chooses 50% survivor, his pension would be only $129 less per month, and I would get $833/mon upon his death. The issue is, I do NOT need his pension. Mine is $38,000/year, going up $1000 each year. We have 1.1 m in 401k/savings. Even though I don't need it, it bothers me to give up half his pension, which will cost us around $1500/year. We just turned 61. We have no survivors and our estate will go to charity. He will collect SS at 62, but I plan to wait until 66.
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Old 06-11-2012, 11:02 AM   #2
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I had to take a choice on my pension, but since I was single, that was an easy decision. I assume your monthly budget and contingencies have all been thought through. I tend to be safe and defensive, so I will throw out that side of the debate for you to think about. If he died 6 months after drawing his pension, would you be comfortable drawing down your assets to supplement your pension if needed? This is only my opinion, but since you appear to be satisfied with your pensions to live off of, losing the $115 a month for future protection doesn't appear to bother your monthly cash flow needs. I might be a minority in the group, but my thoughts are why take any risks, if they is no reason to take any. I must admit I am using no math to determine break even points on whether you " win or lose" financially by this decision. In other words if I was the husband I would insist on it for the protection. My grandmothers both outlasted my grandfathers by almost 30 years a piece as they died in their mid to late 60s.
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Old 06-11-2012, 11:09 AM   #3
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Hi Linda, welcome to the forum.

I would run both scenarios (with and w/o survivor's pension) through FIREcalc and see whet the difference is. If the probability of success is different I would go with the option that has better odds. If they are about the same, I'd take the higher pension now and set aside the extra funds for something unplanned.
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Old 06-11-2012, 12:01 PM   #4
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My wife has always considered herself thriftier than me. My pension was only 1/3 of our total income plan, and our plan had lots of cushion compared to our actual expenses.

I understood the fact that if she died first I'd continue to get 100%, while if I died first she would only get 50%. But, it was tempting to say that since she would want to spend less than me, that's okay.

As it happened, my employer also provided group life on me even after retirement. The group life will pay her a benefit that is multiple years of the pension differential. There was no similar life insurance on her. So we actually went with the 50%, and I think that's reasonably even.
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Old 06-11-2012, 12:08 PM   #5
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DW will have a pension and is 5 years younger than me. I would be pretty comfortable taking it as single life, given the probability that she will survive me. I'll be fine on my own if she doesn't.

The key thing is to run the scenario both ways and make sure the pension doesn't impact you too much if it disappears. Two things to consider are how much your expenses would decrease and the fact that taxes as a single person will be higher than as a couple.
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Old 06-11-2012, 12:15 PM   #6
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When I retired from GM, there was no choice. They didn't give you a choice because in the past there was a lot of pi**in' and moanin' by the surviving wives when they discovered their husbands had not elected that choice. Years ago they changed it and went to 50% survivor benefits. That's the way it was set up and that's the way it is (or was). Now that the entire salaried retirement program is under the control of Prudential, I'm not sure how that will shake out.

Also, I figured DW worked just as hard as me during those years and she deserved to be included in the process.
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Old 06-11-2012, 12:43 PM   #7
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When I was a pilot, we and other airlines had the survivor option in our pensions. Doing the math, we were generaly told it was far better to take the full amount and buy 20 yr term life insurance to cover an early death of the pensioner (me). That's what we did. If I die after the 20 yrs (that would be age 79 for me), it was presumed that inflation would have reduced the purchasing power of the pension so much that losing it wouldn't be a big deal.

In today's low yield and low inflation conditions, that may or may not work out well.

BTW, I was informally told that nearly all the pilots took the full pension, but only a small number actually bought the life insurance. The comparisons kept getting worse because the only pilots taking the survivor benefit were the ones with serious health issues, which raised the cost again, etc. Apparently, GM had similar issues.
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Old 06-11-2012, 12:57 PM   #8
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DW (same age) has two small pensions that start in a year.

I told her to just take the higher single-life option and I'll sign off on it when the time comes.

Heck, she earned them and more importantly, I won't need them if she passes first.

Another point is since I've always covered all normal living expenses, she's going to need the few extra dollars assuming I pass first even though we planned for that event financially.

In her family it worked out quite differently for her parents. Her mother did not work outside the home and her father retired as a long term union employee with a good pension in the mid-80's. At the time, there was no rule for getting the spouse to sign off so her father seleced the single-life option to ensure his maximum retirement income. As it turned out, DW's father lived over a decdade after his spouse died. In that case, the "bet" turned out OK.
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Old 06-11-2012, 01:09 PM   #9
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Originally Posted by Linda1652 View Post
My husband has to make this decision in a few days, as he is retiring by the end of this month. If he chooses 50% survivor, his pension would be only $129 less per month, and I would get $833/mon upon his death. The issue is, I do NOT need his pension. Mine is $38,000/year, going up $1000 each year. We have 1.1 m in 401k/savings. Even though I don't need it, it bothers me to give up half his pension, which will cost us around $1500/year. We just turned 61. We have no survivors and our estate will go to charity. He will collect SS at 62, but I plan to wait until 66.
The military leaves the survivor benefits plan decision to your spouse's discretion. Doesn't matter whether the servicemember wants the feature or not-- the spouse has to sign the paperwork.

My spouse has her own pension, too, so we both declined SBP on each other. It gives me ~$2600/year more to put toward self-insuring or for our travel/entertainment fund.

I think the question is whether "enough" means you'd rather have the extra cash today (to save or spend) or whether you'd like to be blatantly overfunded after your spouse's passing.

"No SBP" has the added advantage of ensuring that we're both worth more to each other alive than dead.
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Old 06-11-2012, 01:21 PM   #10
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If you don't need his pension and he is in good health, then I would chose payments for his life.

Just a curiosity question, given your substantial savings, why is he taking SS at 62? If there is a particular reason for that, it might have implication on the pension decision.

Another option to consider might be to take the full pension and purchase a term life insurance policy with the "extra" $129 a month that would pay a death benefit to you if he passes that can be used to make up for loss of his pension. Not sure how the numbers would work out on that though.
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Old 06-11-2012, 03:29 PM   #11
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I'm a contrarian. Two can live as cheap as one so his pension will be part of your ER lifestyle. If he dies in a couple of years your lifestyle will be seriously crimped compared to what it would have been with a survivor annuity. Maybe you can live with less but why would you want to. A 7.75% reduction in his pension (guesstimate from your numbers) doesn't sound like too much. I took a 10% reduction in mine for a survivor annuity.
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Old 06-11-2012, 03:50 PM   #12
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If you don't need his pension and he is in good health, then I would chose payments for his life.

Just a curiosity question, given your substantial savings, why is he taking SS at 62? If there is a particular reason for that, it might have implication on the pension decision.

Another option to consider might be to take the full pension and purchase a term life insurance policy with the "extra" $129 a month that would pay a death benefit to you if he passes that can be used to make up for loss of his pension. Not sure how the numbers would work out on that though.
If he takes his full pension with no survivor options, it is only $1800/month. Of course taxes will be taken from that amount. Right now, we are living on my pension which is $2700/month after healthcare ded. and taxes, and $2300 after taxes and 20% 401K deductions from my husband. We just live on this amount and not able to save anything for vacations etc. I thought if he collected his SS, it would boost our income to be close to what we are living on now. We would draw from our savings for vacations. Does this make sense now?
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Old 06-11-2012, 04:45 PM   #13
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I wouldn't give up the survivor option. I would prefer a lump sum option but failing that option would rather have the survivor option. Yes, you don't "need" it but that assumes that your pension is paid and nothing happens to your assets. But...stuff happens. The amount more he would get is not enough IMO to make it worth giving up the survivor option.
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Old 06-11-2012, 04:55 PM   #14
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Aren't the two options designed to be actuarial equivalent? If so, this is just a Dirty Harry moment.
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Old 06-11-2012, 05:11 PM   #15
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You could check out a 200K 20 yr term life policy. That would cover you until he was 82. The pension (if not cola'ed) would not be worth much then and life insurance is not taxable.
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Old 06-11-2012, 05:25 PM   #16
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In her family it worked out quite differently for her parents. Her mother did not work outside the home and her father retired as a long term union employee with a good pension in the mid-80's. At the time, there was no rule for getting the spouse to sign off so her father seleced the single-life option to ensure his maximum retirement income. As it turned out, DW's father lived over a decdade after his spouse died. In that case, the "bet" turned out OK.
This is a similar situation (with different outcome) for my inlaws.
FIL had a great pension available as a union worker. He opted out completely for a cash sum... without consulting MIL. At that point she was a SAHM with 6 kids. She immediately realized she could not count on him to save for retirement and went to work for the Fed Gov't as a file clerk. This was when the feds had decent pensions. When they added the TSP option, she signed up for that too. She now has a nice pension, TSP, etc. He has a microscopically small annuity and social security.

I helped with their taxes this year - despite far fewer years working, her contribution to their retirement is about 70% of their income.

Fwiw - they've outlived most of their peers. He's 89, she's 85.
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Old 06-11-2012, 05:36 PM   #17
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My husband retired in 1995 and luckily had picked the survivor benefit because he died a year and a half later . He was in good health and had incredible longevity in his family . That benefit which included health benefits enabled me to work part time and let the investments grow until my sanity returned .
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Old 06-11-2012, 09:09 PM   #18
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Originally Posted by Linda1652 View Post
If he takes his full pension with no survivor options, it is only $1800/month. Of course taxes will be taken from that amount. Right now, we are living on my pension which is $2700/month after healthcare ded. and taxes, and $2300 after taxes and 20% 401K deductions from my husband. We just live on this amount and not able to save anything for vacations etc. I thought if he collected his SS, it would boost our income to be close to what we are living on now. We would draw from our savings for vacations. Does this make sense now?
I get it, but if the two of you need $5,000 a month to live now (your $2,700 and is $2,300 from working), are you sure you can live on only your pension if he were to take a single life pension and pass on?
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