Pension decision

[pb4uski]

I think I have a handle on this but want to post my thinking to get some other perspectives.

I'm planning to take my company pension when I turn 60 this year. As background, I left the company back in the late 90s but could start drawing benefits anytime between age 55 and age 65. The monthly benefit grew at 9.3%/annum from age 55 to age 60 so I have deferred starting my benefits. However from age 60 on the annual benefit increases are more modest, about 4.5% from 60-61 grading down to 3.5% from age 64-65. Since the increases are moderating I think I am better off starting to draw now rather than later.

Given that the monthly benefit increase is moderating is taking my pension now rather than waiting for annual increases of 4.5-3.5% make sense? I realize that by taking it now that I am reducing the amounts I can convert to a Roth staying with in the 15% tax bracket over the next 10 years.

DW is 8 months older than I am, we are both healthy and my family has slightly better longevity.

While I have 13 different pension choices, the choices I am focused on are a single life benefit, joint life with 100% survivorship, joint life with 2/3 survivorship and joint life with 50% survivorship and are $1,613, $1,462, $1,568 and $1,627 per month, respectively.

The cost of insurance to fund a SPIA to cover the benefits lost under the single life option is much higher than the $151 difference in benefit compared to the joint/100% option even using a term insurance ladder so the single life option with life insurance isn't very attractive and there is some tail risk since the life insurance would only go out until I'm 85 but I have some whole life coverage that I might arguably cover the tail.

I did an analysis based on current annuity pricing of how much a SPIA sufficient to provide the benefits that DW would lose if I predecease her and we chose the joint/67% and joint/50% versus joint/100% and the cost of a ladder of term policies to fund the SPIA would cost. See Creating a Life Insurance Ladder

Interestingly, for the joint/100% option compared to joint/67% and joint/50%, the cost of the life insurance would approximate the difference in benefits within +/-$50/month. The cost of insuring for the lost benefits declines over time because the decline in the amounts needed for the SPIA exceed the increase in the unit cost of the insurance as I get older. This pension will replace ~20% of our annual living costs so some minor differences are inconsequential in the whole scheme of things.

One risks is that a 25 year term policy only takes me out to age 85 but I have factored in a provision for life insurance coverage after age 85 at 150% of the cost of 25 year level term.

The more important risk to me is execution risk of having a ladder of 4 or more different term life policies and that DW will actually remember to buy the SPIA to replace the benefits lost, that SPIA pricing could change over time, etc. DW is capable, but generally disinterested in our finances.

My current thinking is that the simplicity of the joint survivor option with full benefits is best since it is simple and the financial benefit of a more complex approach is minimal. Thoughts?

 

[Htown Harry]

Your joint with a 50% survivorship payment amount being higher than the single life option caught my eye.

I was curious enough to run my own pension calculator to see the relative dropoffs of the various payment options.

Like you, my DW and I are within a few months in age. For payments beginning at age 60:

Yours:
single = 100%
joint 100% = 91% of single
joint 67% = 94%
joint 50% = 101%

Mine:
single = 100%
joint 100% = 85%
joint 75% = 88%
joint 50% = 92%

It's just one random data point, but the survivorship options' payout rates in your plan are better than mine.

In any case, I would also lean toward the 100% joint life, without the complications of the life insurance and annuity hedges.

$150 a month in income foregone buys you peace of mind in two ways. As you say, no worries about any actions DW would need to take following your death. And no worries for her about potentially significant adjustments to income after you go.

One more. I have entrusted DW to decide when it's time to turn off the machines keeping me alive at the end. Personally, I like the idea of creating a plan where the person with that responsibility has as little chance as possible of financial matters adding to the stress of that decision.

 

[pb4uski]

....
Mine:
single = 100%
joint 100% = 85%
joint 75% = 88%
joint 50% = 92%.....

FWIW, yours seem to be very close to the relationship of what current payouts are. I get 100%, 86%, 90% and 93% based on market annuity payout rates for 60 year olds so yours all seem close to market.

The joint/50% benefit of my plan exceeding the single life plan caught my eye as well.

 

[papadad111]

A more fundamental question - do you need the pension income now ?

My thought : This is effectively a COLA adjusted pension until taken and is better than inflation increases- could those be beneficial with this annuitized portion of your portfolio combined with SS to hedge longevity? Would it make sense to defer as long as you can and then opt for the 100 percent survivor ?

How are other investment streams doing ?

 

[pb4uski]

We don't need the pension now as we have sufficient taxable funds to provide our living expenses for the next 8-10 years and there are only 5 years left before the pension stops increasing.

Interesting point on the increases being similar to a COLA... but it differs from a COLA pension in that with a COLA pension you are receiving benefits and those benefits are increasing. With this one, I need to forgo benefits on order to get the increase (sort of like deferring SS benefits) and I don't think I could ever live long enough that the paltry increases in benefits would exceed the foregone benefits.

SS benefits increase about 7.5% per annum from 62 to FRA and 8% simple from 66 to 70 so the 3.5-4.5% increases in this benefit seem paltry by comparison.

 

[papadad111]

We don't need the pension now as we have sufficient taxable funds to provide our living expenses for the next 8-10 years and there are only 5 years left before the pension stops increasing.

Interesting point on the increases being similar to a COLA... but it differs from a COLA pension in that with a COLA pension you are receiving benefits and those benefits are increasing. With this one, I need to forgo benefits on order to get the increase (sort of like deferring SS benefits) and I don't think I could ever live long enough that the paltry increases in benefits would exceed the foregone benefits.

SS benefits increase about 7.5% per annum from 62 to FRA and 8% simple from 66 to 70 so the 3.5-4.5% increases in this benefit seem paltry by comparison.

First - always like your posts and enjoy the discussion.

On the annual increases - It is a lower increment than SS increase true but an increase none the less and the market could go reverse for 3 years making that increase look darn good 5 years later. And, given that you don't need the money now, and plan to buy a survivor annuity option, maybe consider this simply as maximizing the portion of your portfolio geared to longevity insurance - and think what waiting 5 years may be in terms of amount for both you and or spouse if you die first or have a series/string of bad returns.

The other option is to take the pension money now but the risk I see is

1. Pension income now raises MAGI and also u must pay tax on it at (insert fed and state tax rate here) ,

2. For magi - hope it doesn't disqualify ACA subsidies if you are partaking in that program, if u wait until 65 to collect pension then you are swapping to Medicare... And won't impact other subsidies.


3. You could collect and then invest the money hoping to earn the equivalent increase via investing the net unused monthly pension money ... But remember income taxes are due on the pension.

 

[MichaelB]

My current thinking is that the simplicity of the joint survivor option with full benefits is best since it is simple and the financial benefit of a more complex approach is minimal. Thoughts?

No pension here, so my response is entirely hypothetical. I would go for the highest absolute pension amount that DW would be left after my demise. This would reduce the chance of her suffering from some asset or portfolio issue in her senior years.

Is there a default choice if you die before taking the pension?

 

[pb4uski]

....The other option is to take the pension money now but the risk I see is

1. Pension income now raises MAGI and also u must pay tax on it at (insert fed and state tax rate here) ,

2. For magi - hope it doesn't disqualify ACA subsidies if you are partaking in that program, if u wait until 65 to collect pension then you are swapping to Medicare... And won't impact other subsidies.


3. You could collect and then invest the money hoping to earn the equivalent increase via investing the net unused monthly pension money ... But remember income taxes are due on the pension.

My tax rate is very low since we have not yet started SS or RMDs. According to Taxcaster, my marginal tax rate if I add the pension on top of our taxable portfolio income is 0% federal. State taxes would be ~3.5%.

No ACA subsidy implications as we are doing Roth conversions to the top of the 15% tax bracket.

Joint/100% at 60 is $1,462 and at 65 is $318 higher at $1,780. So we would forgo $87,720 ($1,462 * 60 months) to gain $3,816 a year in benefits so the payback is almost 23 years at 0% interest and longer with any positive interest rate. Also, if I paid $87,720 today for a joint life SPIA that begins payments in 5 years the payments would be $523/month, much more than the $318/month implicit above. So I don't see waiting as a good deal but I do appreciate the input as it forces me to think these things through and look at it from different angles.

 

[pb4uski]

...Is there a default choice if you die before taking the pension?

If I die before starting to draw benefits, DW would get the a benefit as if we elected a joint/100% benefit the day before I died. FWIW, the pension plan is well run and well funded.

Joint/100% would also be the highest amount that DW could get if I died.

 

[growing_older]

I have no pension coming, so perhaps have no basis for an opinion here. I wonder if additional delay in order to do some additional Roth conversions might be useful. Depending on what your future RMD situation may be, you will have both RMDs and pension after age 70. Possibly lowering those future RMDs may have value, in addition to the 4%-ish bump in pension by delaying.

 

[pb4uski]

Interesting angle that I wondered about as well and then I remembered that I have Roth conversions to the top of the 15% tax bracket built into my retirement planning model. So I run taking it at 60 vs 65 in both cases with joint/100% through my retirement model. I spend 9 years (from 71 to 79) in the 25% bracket either way, but my age 100 NW is 15% higher if I take it at 60 rather than wait.

Great input. Keep them coming!

 

[Telly]

Some years ago, I was faced with a pension-from-the-past decision. Smaller than your pension. I could start it at age 55, or hold off for an increase of 3% per year up to age 60.

As Htown Harry mentions, your survivor rates are pretty good. Mine were not. So my decision was pretty easy: A small pension, not inflation adjusted, only 3% per year increase for waiting (close/at the inflation rate then).
So I took it at age 55, with no survivor option. With the small amount, and not inflation indexed, I wanted to max what I could get out of it before inflation ate it away. So in my case it was a simple decision for me. DW did have to sign off on a form that she knew about it, and that no survivor benefit for her was OK.

It IS nice that every month some $ magically appear at the bank

 

[Big_Hitter]

very uncommon for a 50% J&S to be greater than the SLA


does the 50% option reduce on the "first" death? (i.e. if your spouse predeceases you do you get half your pension going forward?)

 

[Big_Hitter]

regarding the deferral, a 3.5% reduction from 64 to 65 is heavily subsidized


it's about half of what the reduction is for social security at that age

 

[pb4uski]

very uncommon for a 50% J&S to be greater than the SLA


does the 50% option reduce on the "first" death? (i.e. if your spouse predeceases you do you get half your pension going forward?)

Yes, upon either of our deaths the benefit reduces by 50% - they call it Joint & 1/2 to Survivor with 10 years guaranteed. The non-guaranteed option is only 2% higher... $31/month so I prefer the 10 years of guaranteed payments for our kids.

They do offer a Joint & 1/2 to Second Annuitant with 10 years guaranteed option where the monthly benefit would stay the same for me if she dies but reduce 50% for her if I die that would be $1,534/month (a whopping $13/month less than the non-guaranteed version).

Sorry if I created confusion.

 

[pb4uski]

regarding the deferral, a 3.5% reduction from 64 to 65 is heavily subsidized


it's about half of what the reduction is for social security at that age

I guess that I'm looking at it from the other end of the telescope... that the increases in benefits for waiting are low compared to SS or even a SPIA so it is better to take it now than wait.

For example, a joint life SPIA with 10 years guaranteed at age 60 would have a 5.16% payout rate and a joint life SPIA with 10 years guaranteed bought at age 60 with 5 years deferred (benefits starting at age 65) would have a 6.73% payout rate, so the benefit increases 30% over the 5 years. My joint/100% with 10 years guaranteed benefit only increases 22% over 5 years from age 60 to 65 so the increases in the benefit are relatively stingy.

Am I looking at it the right way?

 

[Texas Proud]

Yes, upon either of our deaths the benefit reduces by 50% - they call it Joint & 1/2 to Survivor with 10 years guaranteed. The non-guaranteed option is only 2% higher... $31/month so I prefer the 10 years of guaranteed payments for our kids.

They do offer a Joint & 1/2 to Second Annuitant with 10 years guaranteed option where the monthly benefit would stay the same for me if she dies but reduce 50% for her if I die that would be $1,534/month (a whopping $13/month less than the non-guaranteed version).

Sorry if I created confusion.

That sounds incorrect from what I know about pensions (which is little by the way)....

If you take 50% survivor and you die, survivor gets 50%.... if you die, nothing else happens... you keep getting your pension...

In fact, with my sister's pension, when her DH died her benefit went up since there was not longer a survivor in the calculation...



Now, as always it is what is in the pension language that matters and if they say it goes down to 50% not matter who dies first then you are right... but that makes no sense to me.

 

[pb4uski]

That sounds incorrect from what I know about pensions (which is little by the way)....

If you take 50% survivor and you die, survivor gets 50%.... if you die, nothing else happens... you keep getting your pension...

Perhaps I'm using the wrong term then. Our plan offers both. The one where I get the same amount if DW dies is called a Joint with x% to Second Annuitant... she gets x% if I die. The one where the benefit is reduced if either of us die is called Joint and x% to Survivor.

I'm more focused on what DW would get if I die prematurely because her SS PIA is much smaller than mine so she'll get my spousal benefit so after we start SS if I die her SS benefit will drop by 1/3 since she'll get my benefit but her spousal benefit will go away.

 

[Texas Proud]

Perhaps I'm using the wrong term then. Our plan offers both. The one where I get the same amount if DW dies is called a Joint with x% to Second Annuitant... she get x% if I die. The one where the benefit is reduced if either of us die is called Joint and x% to Survivor.

I'm more focused on what DW would get if I die prematurely because her SS PIA is much smaller than mine so she'll get my spousal benefit so after we start SS if I die her SS benefit will drop by 1/3 since she'll get my benefit but her spousal benefit will go away.

OK... that was not an option with anybody that I know with a pension... I would not go there... but it could explain why your current benefit is higher than just you alone... the odds are better that one of you is going to die in a certain amount of time instead of just you...

 

[Big_Hitter]

OK... that was not an option with anybody that I know with a pension... I would not go there... but it could explain why your current benefit is higher than just you alone... the odds are better that one of you is going to die in a certain amount of time instead of just you...

those are pretty rare - that's probably why he has 13 optional forms of payment

 

[Big_Hitter]

joint and survivor versus joint and last survivor, I think that's IRS parlance

 

[Slow But Steady]

Not to throw a wrench in thw works, but is there a lump sum option?

With interest rates pretty low, the lump sum payments tend to be higher than usual.

 

[pb4uski]

Unfortunately, no lump sum option.

 

[Texas Proud]

Unfortunately, no lump sum option.

I just noticed you did not put down the amount if there were no survivor options... IOW, what would you get if you were the only beneficiary...

I think most of the people that were comparing were not doing so apples to apples...

 

[pb4uski]

The no survivor option, just for my life, is the $1,613/month in the OP. The $1,613 is for 10 years guaranteed. With 0 years guaranteed the benefit is $1,642 and 5 years is $1,635. While I plan to stay around for some time. I'm thinking the give up of $29/month for 10 years of guaranteed payments is preferable since then either me, DW or our kids will at least get a good chunk out of that pension. With the 0 years guaranteed if I die shortly after I start my pension the plan would get off scot-free and that wouldn't sit well with me.