Help Re Options for Retirement Monthly Payouts

[Ginger]

We are at the point now to pick an option for my husband's monthly payout.
HELP... I always read to pick the highest amount possible, but here is our list!!!

Unmodified Allowance - highest retirement benefit payable. It would end upon principal's death. No continued payments to beneficiary.

Option 1 - Lump Sum Payment of remaining contributions to beneficiary upon death.

Option 2 - Beneficary will receive the same monthly payment as principal, if beneficiary dies first, it reverts back to the unmodified allowance. (THIS IS THE OPTION WE ARE CONSIDERING.)

Option 2W - slightly higher allowance for principal and your beneificary than in Option 2. If beneficiary predeceases, you continue to just receive the option 2W amount.

Option 3 -- beneficiary to receive a monthly allowance equal to 1/2 the amount of retirement allowance. If beneficiary predeceases, allowance will increase to unmodified amount

Option 3W -- option provides for a monthly benefit that is slightly higher than Option 2, and provides that beneficiary receives 1/2 of allowance. If beneficiary predeceases, it continues at the 3W rate and no increase to principal.

and

Option 4 -- Customize the type of allowance you want to provide your beneficiary, as long as that amount is not more than that of Option 2W.

Any thoughts ==

 

[Martha]

Hard to evaluate without the numbers.

 

[VoyT]

One though, should your DH die first, would you have enough income without his benefit payment? If not, then I'd be looking at Option 1 or 2 (which you're doing.) I'm not sure I even understand any of the others!

 

[yakers]

So far the plan my wife & I have is to have her receive 55% of the amount we receive if I die. My pension is reduced about 10% for this benifit. On her retirement plan I will receive 50% of the amount she will receive if she dies first. I think her pension is also reduced about 10% for this benifit. She should be able to live on 55% of my pension and all of hers plus we have a paid off house and some IRA and 403b funds and life insurance (for now). Her pension isn't all that much, maybe 20K a year. She should also receive a small SS payment someday. No SS for me, a govt employee.

 

[Ginger]

Yakers, I think Option 2 is the way to go. I read that taking the Unmodified pension (highest amount available with no beneficiary benefit), the best route to take is to purchase life insurance. I feel more secure having a monthly benefit, even though I believe our savings/stocks/IRAs would generate enough income.
I will receive Social Security (plus my IRAs, but my husband will only receive his gov't pension.

 

[JWR1945]

Yakers, I think Option 2 is the way to go. I read that taking the Unmodified pension (highest amount available with no beneficiary benefit), the best route to take is to purchase life insurance. I feel more secure having a monthly benefit, even though I believe our savings/stocks/IRAs would generate enough income.
I will receive Social Security (plus my IRAs, but my husband will only receive his gov't pension.

I recommend against the Unmodified pension option unless there is a compelling reason. This is an unpleasant thought, but what if ...just about anything really bad happens: a forgetful spouse who does not make his insurance payment? an intentionally forgetful spouse? a divorce?

Generally, one can live on less money than two. This should influence your choice. But it may not matter because both of you have your own sources of income.

Have fun.

John Russell

 

[Nords]

We are at the point now to pick an option for my husband's monthly payout. 

My FIL retains great peace of mind from knowing that his pension was given to him as a lump sum instead of as some version of a monthly payment.

Another nice thing about today's lump sums is that low interest rates make them pretty sizeable.

So do you have to take the monthly payments? Because if you can take a lump sum, you can design your own payments and change your mind as often as you want.

 

[nwsteve]

So do you have to take the monthly payments?  Because if you can take a lump sum, you can design your own payments and change your mind as often as you want.

You do not mention the finanical viability of your husband's firm and their pension fund health.  Unless you have an adversion to managing your lump sum, the other advantage of a lump sum, is you are in control and really do know what you got.  I bet there are a bunch of airline pilots right now who wish they took their payments as a lump sum.
Nwsteve

 

[Patrick]

Ginger, we have similar payout options here.  A couple factors I like to consider are:

1. Health of each spouse. Since we're both in good health we're likely to live to our actuarially predicted ages.  If one of us were in poor health, I would consider an option that would leave more money to the survivor. I.E., if I were sick, I'd lean toward Option 2, if my wife were sick, I'd lean toward the Unmodified Allowance.

2. The relative ages of each spouse.  Since women tend to live 10-12 years longer than men, if my wife were 10-12 years older than me, I would lean toward the Unmodified Allowance, because we are both likely to die around the same time - there is less need for continued payments. Conversely, if my wife were around my age or younger, I would lean toward option 2 or 3, since it would be likely that she would outlive me and need continued payments.

You really need to get some hard numbers from the company to make a good decision.  Here, the difference between the Unmodified Allowance and Option 2 is about 8%.  Many retirees feel it's worth that 8% reduction for the added protection for the spouse.

Good Luck,

Patrick

 

[SteveR]

My previous company had 14 options on their pension payout to choose from. and none were lump sums only payments.

We just tried to do the best we could and took one option for her and a different one for me. I wish now we had done it differently but who knew she would only collect on it for 7 months. Life is short and tomorrow is not promised to anybody. Don't dwell on it but don't ignore the possibility of an early demise. She was only 56.

 

[Ginger]

We decided to go with an Option 2 plan. Slightly reduced monthly benefit. If my husband dies first, my monthly benefit would be 60%.

Another hurdle. If we remain in California, our medical premium will be moderate considering we can remain on an HMO plan (or a PPO if we so desire). If we leave California, we must go on the PPO plan which is double in monthly premiums. Feel like we are being held hostage at this point.

 

[Patrick]

We decided to go with an Option 2 plan.   Slightly reduced monthly benefit.  If my husband dies first, my monthly benefit would be 60%. 

How much did you have to give up vs. the Unmodified Allowance?

 

[Texas Proud]

My sister went through this and one of the suggestions that I gave them was to take option 1 and buy a term life insurance on her for a fixed amount of time.... the life insurance is enough to buy an annuity that will 'replace' the amount you are receiving from option 1 (or some other amount you might want). The difference between the payout from option one minus the cost of the insurance was higher than option two. Also, you could 'stop' paying on the insurance if you decide that you have enough money to live on and do not need that safety anymore..

In the end, they decided this was too much trouble and chose the option that gave 50% to surviving spouse (option 3).

 

[Patrick]

My sister went through this and one of the suggestions that I gave them was to take option 1 and buy a term life insurance on her for a fixed amount of time.... the life insurance is enough to buy an annuity that will 'replace' the amount you are receiving from option 1 (or some other amount you might want).  The difference between the payout from option one minus the cost of the insurance was higher than option two.  Also, you could 'stop' paying on the insurance if you decide that you have enough money to live on and do not need that safety anymore..

In the end, they decided this was too much trouble and chose the option that gave 50% to surviving spouse (option 3).

I just stumbled across this article on the subject by my retirement plan.  Our Option 1 is the same as Ginger's Unmodified Allowance and we don't have the option for a lump sum.  The other options are similar.

PENSION MAXIMIZATION
If you meet with a personal financial planner to discuss your retirement, you will likely hear the term "pension maximization" as something you should consider. What's the concept behind this term? Why all the debate? Here's a simple explanation and some things to think about.

At retirement, you have the choice of selecting one of several retirement plans. The unmodified plan (Option 1) provides you with a lifetime benefit but provides no continuing payment to a beneficiary after your death. The remaining retirement plans (Option 2 through 7) provide you with a benefit reduced from the amount you would receive from Option 1, but with benefits continuing after your death to your beneficiary for the remainder of their lifetime.

The concept behind the term "pension maximization" is not to elect any of the Options 2 through 7 at retirement. Instead, take the higher income provided by Option 1 and, with some of the extra money you receive by choosing this rather than one of Options 2 through 7, buy an insurance policy on your life. The pitch is that you will enjoy the advantages of higher income during your retirement and an insurance policy that protects your spouse with a lifetime benefit.

Why all the debate? Although the "pension maximization" concept sounds great on the surface, most of you will probably find that few life insurance policies exist that will guarantee coverage equal to the spousal benefits offered by PERS, i.e. a policy that provides the same protection as PERS' spousal benefit for a premium that does not exceed the savings realized by choosing Option 1. Some plans may claim to do this but again they are probably not guaranteed. Insurance payouts from these plans are contingent upon dividend rates and may not be as high as expected. There is no way to know in advance if these plans will work the way they were represented to you.

Some other things to consider are:

Life is uncertain. What happens if you don't budget properly and can no longer afford to pay the life insurance premiums?
Can the insurance policy match the cost-of-living increases that will be given by PERS?
How would any future income tax rate increases lower the difference gained from selecting Option 1?
Your health at retirement. Can you qualify for life insurance?
How well is your beneficiary protected if you die immediately after retirement?
How stable is the life insurance company?
As they say, "The only guarantees in life are death and taxes." Keep this in mind the next time you are approached with the concept of "pension maximization". This concept might be alright in your individual case, but be sure to look at all of your PERS' and life insurance options and make an informed decision that you can live with.

 

[Texas Proud]

Patrick,

Very good article... it is interesting as I came up with this idea for my sister on my own and did not see anything about it...

But, here is her info...

Her payments do not go up unless the legislature passes a bill. They have been told not to expect any increase in payments for at least 10 years, so it was not a factor in deciding on the life insurance policy.

She qualified for a fixed rate term policy. Use only top A+ rated insurance companies.. again, how safe is anything?

The difference between the option 1 and 2 or more was plenty to pay for a policy, but the downfall was that the 'spouse' wanted a lot more money than needed to replace the income. Even then, it was still a bit on the plus side, but not enough for them to worry about.

You should be able to pay the premium since you would have been getting less with the other options and not gone the insurance way if it was more expensive... it does take discipline that you might not have, but then you should not go into this anyhow.