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Which Pension option to choose ?
Old 03-15-2004, 07:31 AM   #1
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Which Pension option to choose ?

Finally the time has come to retire and I have to pick a pension option. Two choices (1) single life annuity and
(2) level income to age 62.
I'm 57.5 as of May 2004. So if option 2 is picked I would have 4.5 years of level income.
Level income is an option that gives me more money for the 4.5 years and at age 62 is reduced by the amount of social security that they estimate I would be entitled to receive.
So, that means that I would receive the same amount of money ( pension + ss ) for the rest of my life.
After crunching the numbers, the break even point is about 19 years from now. That's when the single life annuity passes the amount received from option 2. That's assuming that I would invest the dfference between option 2 and option 1 for the 4.5 year period and receive a modest 4% return.
I would be interested to hear what others have to say about my choices.
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Re: Which Pension option to choose ?
Old 03-15-2004, 07:33 AM   #2
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Re: Which Pension option to choose ?

PS: I really don't recycle dryer sheets, but when retires I may find the need to save money and that's a good way to save.
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Re: Which Pension option to choose ?
Old 03-15-2004, 11:40 AM   #3
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Re: Which Pension option to choose ?

We need to know about any cost of living adjustments. Social security payments include cost of living increases. Many pensions and annuities do not.

Inflation, even mild inflation, is a biggie.

Have fun.

John R.
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Re: Which Pension option to choose ?
Old 03-15-2004, 01:48 PM   #4
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Re: Which Pension option to choose ?

unfortunately, my pension does not have any cost of living increases. If I took the level income to 62 payment, my first 4.5 years would be x dollars. At age 62, my pension would be reduced by about 55% and soc. security would kick in to replace the lowered pension. And of course, s.s. has cost of living increases and we hope that continues.
What this would allow me to do, is to postpone taking money from my 401k and other investments (stocks and cds) until age 62 ( that's a plan).
If I took the single life ann. pension (no cola), I would have to begin robbing my other investments (maybe not the 401k).
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Re: Which Pension option to choose ?
Old 03-15-2004, 06:05 PM   #5
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Re: Which Pension option to choose ?

bennevis,


IMHO, If you invested the difference in a well
diversified family of index funds you would do
better than 4%. If you believe the Gordon
Formula, a fund like Vanguard's Total Stock Market
will return 6-8% over the long term. We might
even get 10-11% if past history is prologue.

Perhaps a more agressive assumption on return
would clarify the picture. If you have good genes
and good health you will likely last well into your
80's. It's a tough call to make, but I would be
inclined to take option 1 and look for part time
work and/or cut costs to fill the gap. Don't dip
into the 401k if you can avoid it. There are ways
to avoid the tax penalty, but it is best to let the
sheltered stuff compound as long as possible.

Best of luck,

Charlie
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Re: Which Pension option to choose ?
Old 03-15-2004, 06:23 PM   #6
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Re: Which Pension option to choose ?

Quote:
If I took the level income to 62 payment, my first 4.5 years would be x dollars. At age 62, my pension would be reduced by about 55% and soc. security would kick in to replace the lowered pension. And of course, s.s. has cost of living increases and we hope that continues.
I hope the "level income" doesn't mean the pension adjusts downward each year as SS goes up or that would eat up the COLA from SS. Just a thought of a 'loophole' to look out for.

In either case, I would put the choices into FIRECALC and see what it suggests for payout each way.

Another factor to consider would be survivor benefits. Often pension plan survivor benefits don't consider the spouses age where annuities do. This might make the pension option attractive for anyone with a younger wife.

Wayne
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Re: Which Pension option to choose ?
Old 03-16-2004, 05:03 AM   #7
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Re: Which Pension option to choose ?

Wayne,
the level income option would not decrease yearly - only goes down at age 62, and then remains the same.
.
Charlie,
Yes, a good fund should do better than 4%, but I like to be conservative with my calculations, as I'm not real confident about this market, especially after the horrible bear market that we just went through. And the past month's performance of the market does nothing good for my confidence in the future.
.
I don't like the fact that at age 62, I would be taking a dramatic cut in pension ( offset by the s.s.).
I re-crunched the numbers using take-home pay instead of gross pay and determined that the single life annuity passes the level income 62 pension after 16 years (not 19 as originally thought). So, that means after 16 years, I would be 73.5. Genes tell me that I should live beyond that age (knock on wood). And none of my number crunchings have taken in the 'cost of living' risk.
They're just assuming that the cost of living remains the same year after year - of course, that won't happen.
.
If I take the single life ann., I would have to supplement that with my stock dividends and my cd income. That probably would not quite cover what I would need, so, I would have to sell some stock periodically or dip into my 401k for a small amount monthly. But, at least initially, I would try to live off my single life ann. plus dividends and cd income. Then at age 62 in 4.5 years, I would get the biggest pay increase of my life - social security.
And that's opposed to the biggest pay cut of my life if I took the level income option.
.
I've played around with firecalc (great tool) and noted that I can take more out ( much more than 4% ) until age 62 and then take less out after that - because social security arrives.
.
Initially I was thinking that the level income option was better, but, you can probably tell that I leaning the other way right now and I have to decide by 3pm today.
Rush, rush, panic, panic !!

Ray

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Re: Which Pension option to choose ?
Old 03-16-2004, 05:27 AM   #8
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Re: Which Pension option to choose ?

In our case, I took the straight pension at 55(er'd at 49) so the frugal gears(cut expenses) were already engaged and we didn't 'feel deprived' - looking foward to SS in slightly under two years. A lot of my buddies at the plant took the higher amount early - only time will tell. I just went with my gut - knowing my expenses cutting skills and not expecting inflation to go away.
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Re: Which Pension option to choose ?
Old 03-16-2004, 05:40 AM   #9
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Re: Which Pension option to choose ?

BTY - my pension is fixed(no cola) and my girlfriend(??heh,heh/domestic partner) gets five years full pension if I croak first.
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Re: Which Pension option to choose ?
Old 03-16-2004, 06:03 PM   #10
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Re: Which Pension option to choose ?

I too will be faced with the same option. I vote for the leveling option for a couple reasons:
1) I want to be sure I collect at least some of the money. The earlier I get it the more I know I will keep. Uncollected money is in jeopardy due to early death and inflation, which brings me to point two:
2) My pension is also not adjusted. Therefore it is impossible to accurately predict a break-even age, only guess at it using history as a guide. If we do get into some years with high inflation, my pension becomes nearly worthless in 20 years.

Tough decision. Hope you make the right one (and me too).
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Re: Which Pension option to choose ?
Old 03-17-2004, 06:54 AM   #11
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Re: Which Pension option to choose ?

Hiss,
The decision has been made : Single Life Annuity.
Thoughts behind the decision:
. don't want to suffer the decrease in pension at age 62. Inflation makes the decrease even worse.
. want to get the 'big raise' at age 62 when s.s. becomes available.
. I'm planning on living longer that 16 more years (God willing ), and that's the break even point... the point when the s.l.a. passes the Level Income to 62 option.
. Using Firecalc, I see that for the next 4.5 years (to age 62), I can withdraw much, much more than 4% and then at age 62 withdraw less because of s.s.
I would only do that if the wife loses her job, but the option is there if needed.

Oh well, no turning back now, but I think I made the right decision, I'm content with it.
Cheers,
Ray
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Re: Which Pension option to choose ?
Old 03-17-2004, 03:34 PM   #12
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Re: Which Pension option to choose ?

To reinforce your own conclusion: You may decided to supplement your income. If so, it will be a lot easier to find suitable part-time work within the next 4.5 years than later.

Have fun.

John R.
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Re: Which Pension option to choose ?
Old 03-17-2004, 04:27 PM   #13
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Re: Which Pension option to choose ?

The cost savings of not working may surprise you - and 'could be as good as a part time job'. The "no see um" dollars may not get spent as fast.
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