Retired this week...need pension advice

[trishglxk]

Hi...I officially retired this week at age 52 after 30 years in the private sector (the last 2.5 yrs I have been on a retirement bridge leave of absence). I have to finalize my decision re: pension, and would appreciate feedback on the following options:

Option 1: lump sump of $275K that I would roll into a self directed IRA
Option 2: fixed monthly payment for life of $2,400
Option 3: $3,400/month until age 67, thereafter $800/month
Option 4: $3,200/month until age 62, thereafter $1,500/month

My husband is 50 and in-between jobs, so current household income is zero. Based on the jobs outlook, we're making financial decisions using the assumption that both of us are now retired.

We have non-tax-deferred savings that we could live on for about 10 years, and combined we have >$1.3M in 401k's. Our combined social security payment at age 67 would be somewhere between $3,500 - $4,000/mo.

I like option #3. If I'm doing the match correctly, the implied interest rate on the annuity payment based on my calcs is in excess of 10%, assuming a life expectancy of 90 years. I'm not confident I could get that kind of return in today's market by investing the lump sum myself.

Appreciate your thoughts.

 

[MichaelB]

Hi trishglxk, and welcome. Those are interesting options. What do you estimate your annual budget or spending needs to be, including taxes?

 

[trishglxk]

Hi Michael,
My husband and I (no kids) need about $10K a month. That number will drop to $7K a month in 5 years (when I'm 57) when our mortgage is retired.

We're living off after tax dollars at present, so no Federal income tax due for the forseeable future (plenty of itemized deductions).

 

[nun]

If all you are considering is total payout I'd ignore options 1 and 4.

If you think you'll live into your 80s I'd take option 2. If you think you'll die before 75 or you want most of your money early in retirement go for option 3.

As a comparison the payout on a $275000 SPIA for you would be around $1200 a month, so unless you have a need for access to the lump sum I don't see it as a good option

 

[Bestwifeever]

Congratulations on the retirement!

Is there a survivor benefit in the monthly plans if you keel over next year?

 

[jclarksnakes]

It looks like you are in good shape to call yourselves retired now. I like longterm planning rather than taking larger pension now to avoid using up savings. I would take option 2 and use non-deferred savings and the pension to get you through to when you start taking SS. When you can start taking money out of the 401k accounts you can run the numbers to see how it would work taking some from them instead of from the non-deferred savings.

 

[MasterBlaster]

Options 3) and 4) dovetail with collecting Social Security at either full retirement age or at 62. These pension options allow (along with SS) some sort of constant income over your lifespan.

Doing my calculator math, The lump sum seems way small compared with the life annuity.

I would choose one of the last three options for you.

 

[trishglxk]

Thanks for the input!

Re: survivors benefit--the above annuity payments would be reduced by about $200/month if I choose the annuity option(s) that continue to pay out after my death.

DH is 2 years younger, but for life expectancy let's call it a jump ball between us (longevity on both sides of the gene pool).

We discussed it, and he thinks we should forego the survivors benefit options (the assets we have should be enough to support him).

Anyone think this is outlandish?

 

[Bestwifeever]

Makes perfect sense to me. You are in the catbird seat with your plan.

Do you have retiree health insurance too or is that already in your monthly budget?

 

[trishglxk]

Retiree health insurance runs about $3,400/year for me/my DH. This will surely increase annually, but we've factored that into our budget.

 

[FinanceDude]

Option 2 looks good to me if I were you. The income would be constant regardless of market conditions, etc..........

 

[Animorph]

Thanks for the input!

Re: survivors benefit--the above annuity payments would be reduced by about $200/month if I choose the annuity option(s) that continue to pay out after my death.

DH is 2 years younger, but for life expectancy let's call it a jump ball between us (longevity on both sides of the gene pool).

We discussed it, and he thinks we should forego the survivors benefit options (the assets we have should be enough to support him).

Anyone think this is outlandish?

If you run the numbers and they work OK for him that's not outlandish. Don't forget that taxes for a single person can be substantially higher than as part of a couple. However, given that you are the one on this forum, are his financial skills up to a reduced income or would he be better with a larger margin of safety? I plan to take DW's pension as single life as well, but she's 5 years younger, female, and I'm the financial planner of the family. I'll be fine with out it if it comes to that. I wouldn't be as comfortable if it was my pension.

 

[Midpack]

All else being equal, I'd go for the lump sum (and did a year ago) - but I'm comfortable investing the money and my options were roughly equal. However, the lump sum you're being offered doesn't appear to be at all competitive for whatever reason. To get $2400/mo for a 52yo female with no survivor benefit would cost about $547K per Immediate Annuities - Instant Annuity Quote Calculator.!!! Sounds like your options are 2 thru 4, of those it depends on your other sources of income (and timing, like when you'd take Soc Sec) as to which is best. Best of luck...

 

[arky]

I would choose option 2, because I am convinced I will live a long time.

 

[trishglxk]

I definitely wear the calculator in the family. I guess one of these days I'll have to give him the passwords to our accounts (lol).

Good point on the higher tax rate for single persons. Maybe that will be incentive for him to remarry in the event of my early demise.

Back to the original question....I've eliminated the lump sum option, as well as option 4 (since I doubt I'll want to take the hit on my SS payment be taking it at 62).

Perhaps if I perform a NPV of future cashflows that factors in inflation will help me choose between options 2 and 3.

Thanks to all...

 

[MichaelB]

I definitely wear the calculator in the family. I guess one of these days I'll have to give him the passwords to our accounts (lol).

Good point on the higher tax rate for single persons. Maybe that will be incentive for him to remarry in the event of my early demise.

Back to the original question....I've eliminated the lump sum option, as well as option 4 (since I doubt I'll want to take the hit on my SS payment be taking it at 62).

Perhaps if I perform a NPV of future cashflows that factors in inflation will help me choose between options 2 and 3.

Thanks to all...

Have you tried FIREcalc? At first glance the numbers look good and like Feever said you are in the drivers seat here. Seeing which option gives you the greatest portfolio survivability might help.

 

[pb4uski]

I definitely wear the calculator in the family. I guess one of these days I'll have to give him the passwords to our accounts (lol).

Good point on the higher tax rate for single persons. Maybe that will be incentive for him to remarry in the event of my early demise.

Back to the original question....I've eliminated the lump sum option, as well as option 4 (since I doubt I'll want to take the hit on my SS payment be taking it at 62).

Perhaps if I perform a NPV of future cashflows that factors in inflation will help me choose between options 2 and 3.

Thanks to all...

On an NPV basis it looks like option 3 is the winner unless you live real long. The NPV of Option 3 exceeds the NPV of Option 3 until you turn 95 assuming a 5% interest rate by my calculations.

The other thing I like about option 3 is that it would make it easier for you to delay taking SS until after 62 if you chose to which would enhance that option compared to option 2.

 

[trishglxk]

Hi Michael...I did plunk a few numbers into FIREcalc. Interesting analysis...scary and exhilarating at the same time. Found it a little challenging however as an aid in making this specific decision. So I decided to fire up excel and plunk in cash flow scenarios for options 2, 3, and 4 above-- by year-- so that I can compare them after discounting for the effects of inflation over time.

I used a 4% inflation rate, instead of the historical 3% rate, as the costs I will encounter as a retiree (healthcare, food & entertainment, etc.) seem to be outpacing the average inflation rate of 3% (which is favorably impacted by the costs of housing, clothes, etc.)

Net net, if I live to 90, then then options 2, 3, and 4 when adjusted for inflation are statistically identical.

At age 85 and younger, the clear choice is option #3, taking the higher payment until age 67.

At age 85 and younger the worst option by a sizeable margin is #2--$2400/ mo for life. Even though it yields the highest absolute payment, the ravages of inflation kick this option to the floor.

So, option #3 yields the highest NPV, and since I'm opting for no survivors benefit, the front-end loaded payment presents the best opportunity to get the most value from this pension before I croak.
I think I've made my decision.

Thanks to the folks who responded to this post--you are awesome.

 

[trishglxk]

Pb4uski, our posts crossed in cyberspace.
We agree!

 

[MasterBlaster]

So, option #3 yields the highest NPV, and since I'm opting for no survivors benefit, the front-end loaded payment presents the best opportunity to get the most value from this pension before I croak.
I think I've made my decision.

While option 3 may indeed be a fine choice. NPV calculations assume an interest rate that may or may not be realistic going forward. It goes without saying that your mileage may vary.

 

[MichaelB]

Hi Michael...I did plunk a few numbers into FIREcalc. Interesting analysis...scary and exhilarating at the same time. Found it a little challenging however as an aid in making this specific decision. So I decided to fire up excel and plunk in cash flow scenarios for options 2, 3, and 4 above-- by year-- so that I can compare them after discounting for the effects of inflation over time.

I used a 4% inflation rate, instead of the historical 3% rate, as the costs I will encounter as a retiree (healthcare, food & entertainment, etc.) seem to be outpacing the average inflation rate of 3% (which is favorably impacted by the costs of housing, clothes, etc.)

Net net, if I live to 90, then then options 2, 3, and 4 when adjusted for inflation are statistically identical.

At age 85 and younger, the clear choice is option #3, taking the higher payment until age 67.

At age 85 and younger the worst option by a sizeable margin is #2--$2400/ mo for life. Even though it yields the highest absolute payment, the ravages of inflation kick this option to the floor.

So, option #3 yields the highest NPV, and since I'm opting for no survivors benefit, the front-end loaded payment presents the best opportunity to get the most value from this pension before I croak.
I think I've made my decision.

Thanks to the folks who responded to this post--you are awesome.

FIREcalc isn't a NPV calculator, it looks at portfolios, income streams and expenses and helps assess the likelihood that you may run out of money. You have many inputs and options so the complexity is understandable. Good luck with your decision.

 

[pb4uski]

While option 3 may indeed be a fine choice. NPV calculations assume an interest rate that may or may not be realistic going forward. It goes without saying that your mileage may vary.

Yipper...that's why they call them assumptions...

 

[BigE]

Awesome position to be in. Congratulations on positioning yourself to do what many only dream of. A few years behind you, not yet retired, and not as wise as the others who have posted good advice/tips. No one knows what the future holds for SS but to me it seems that if you have a fixed second source of retirement income, it's going to be an easy target/excuse to reduce your SS benes, either thru direct reduction or increase taxes. Also, to hedge your bets against the nasty fiscal irresponsible ones in D.C. who will have to increase taxes eventually, you might consider ROTH conversions while tax rates are low for you and spouse. And if spouse or you do even a small amount of part time work, starting ROTHs might be prudent. Just some food for thought. Good luck!

 

[Buckeye]

Re: survivors benefit--the above annuity payments would be reduced by about $200/month if I choose the annuity option(s) that continue to pay out after my death.

We discussed it, and he thinks we should forego the survivors benefit options (the assets we have should be enough to support him).

Anyone think this is outlandish?

Without a survivors benefit, your husband will lose both your pension and your social security at the same time. No concern?

 

[pb4uski]

....Also, to hedge your bets against the nasty fiscal irresponsible ones in D.C. who will have to increase taxes eventually, you might consider ROTH conversions while tax rates are low for you and spouse. And if spouse or you do even a small amount of part time work, starting ROTHs might be prudent. Just some food for thought. Good luck!

I agree that from ER to pension/SS streams start is a good time to ocnsider Roth conversions. However, in addition to taxes it is important to consider other effects, in particular the coming subsidies for health insurance under Obamacare which it appears will be based on 2012 tax return data. There are some scenarios where an additional $1,000 of Roth conversion could cause a $4,000 reduction in the subsidy so the economic cost of the additional $1,000 in Roth conversion would be outrageous. YMMV since you seem to have a good retiree health insurance program available to you.