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09-07-2006, 05:41 PM
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#21
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Full time employment: Posting here.
Join Date: Oct 2003
Posts: 961
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Re: Pension Choices
Quote:
Originally Posted by justin
ats5g,
A flat 25% tax is very unrealistic to assume for $63000 of pension income. Given the standard deductions and exemptions for a married couple and assuming no other income, the overall tax rate would be around 10% federal, plus, say, 5% state.
Further, the amount you determined that the life only w/ term guy would have saved is $117,780 in nominal terms. Then you adjust it for inflation to get $66,499 which would yield $836 per month in real terms. Then you compare the real $836 per month to the $4712 nominal amount that the surviving spouse could have received under 100% J+S. To be fair, you need to compare nominal to nominal or real to real, not real to nominal.
Using the 15% tax rate and comparing nominal dollars to nominal dollars, the life only+30 yr term option would provide $1767 per year extra. Invested over 30 years at 8%, that would be around $200,000, which could then buy you an annuity of $2,574/mo versus $4712/mo that the 100% J+S spouse would get. 45% less for the remaining life of the surviving spouse. But you get a 50% shot at $700000 income tax free life insurance proceeds during the 30 year term coverage.
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Hi Justin,
Good point about the taxes. I re-did the calculations using the semi-correct fed and state taxes:
[edited] If we don't include inflation, I get something like $158,017 ending vaule [before taxes], which works out to $1,986 a month at age 85. I still think this could be deal breaker, given the spouse could've had $4,712 at 85. Especially since this whole pension max thingee was supposed to protect the spouse even though the husband took the single life annuity.
- Alec
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09-08-2006, 07:55 AM
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#22
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 4,005
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Re: Pension Choices
Quote:
Originally Posted by ats5g
Hi Justin,
Good point about the taxes. I re-did the calculations using the semi-correct fed and state taxes:
If we don't include inflation, I get something like $158,017 ending vaule [before taxes], which works out to $1,986 a month at age 85. I still think this could be deal breaker, given the spouse could've had $4,712 at 85. Especially since this whole pension max thingee was supposed to protect the spouse even though the husband took the single life annuity.
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It's a risk - but the only scenario in which it is a potential risk is if the husband lives past age 85 (approximately a 50% chance) and if the wife lives past 85 (approximately a 50% chance). The cumulative probability of these two events occuring (assuming the two subevents are independent) is 25%.
So the wife would have a 25% chance of being potentially at risk (the husband could still outlive his wife under this scenario and survivor benefits would be a non-issue - what are the odds that an 85 y.o. male would outlive an 85 yo female - maybe 30%?).
On the flipside, the term life insurance has a 50% likelihood of paying out $700000.
Sounds like a dice roll in the end.
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