Choosing form of pension- Husband/Wife

[bizlady]

We're 16 months out from retiring, and will make a decision late this coming year on which form of pension payout we will take.

DH has a non-COLA pension available at 55. He can take $843 a month for life guaranteed for 60 months (I get nothing on death execpt the balance of the 5 years if he were to die early), $759 for life and I would get 50% of that if he dies, $721 a month and I would get 75%, or $708 a month and I would get 100%.

We project expenses with taxes to be $60K at retirement with a 3.5% inflation built in, and have enough in savings to over us until 93 and 95 respectively, budgeting 75% of what we expect for social security, and add'l money budgeted for medical expenses from 55 to death.

Husband is in good health, and longevity in his family is good. I can today conservatively attribute annual expenses of $9600 to him that would go away of he were to die. (second vehicle, groceries, life insurance, clothing, medical etc.)

If I were to die first, his pension would go back up to the non-spouse option the following month ($843/month)

So what should we be looking at and considering-- maximizing monthly payments in pension, or conserving income if he were to die? Any insights? Those of you that have gone through this, anything you would do different?

 

[73ss454]

Since you guys already have enough to last I don't think a 100 bucks or so will make much of a difference. I say take the 100% for you if DH dies first since it goes back to 100% if you die first. Seems like a no brainer to me.

 

[bizlady]

73ss454 that is where we are leaning--more so because if nursing homes expenses ever got a chunk of change, that preserves income, but I will be interested to see what others are are thinking...

 

[Moemg]

My husband picked the survivor benefit which reduced his pension by 10% and paid the survivor 60% cola plus health benefits . He also had longevity on his side and was pretty healthy . He died before he was retired two years and my case is not unique . Women out live men so whichever you pick make sure there is a survivor benefit .

 

[mickeyd]

I have always looked at my pension as a joint deal along with DW. All of our assets are managed as a single account and it only makes sense to include her as a 50% partner in any pension that I get.

Sure it reduces our current income stream, but she was with me all along this trek since 1970 and deserves an income stream if I check out before she does.

 

[jimnjana]

I have always looked at my pension as a joint deal along with DW. All of our assets are managed as a single account and it only makes sense to include her as a 50% partner in any pension that I get.

Sure it reduces our current income stream, but she was with me all along this trek since 1970 and deserves an income stream if I check out before she does.

In our case, both my wife and I have pensions, which are almost identical in value (with disability included) we chose not to have a survivor option, partial because of the pensions, partially because of the 10 yr age gap (DW aka cougar).

Jim

 

[megacorp-firee]

We chose the 100% survivors benefit, since I FIREd at 56. We figured one of us is going to get to 90 and the difference could not be made up with insurance or some other vehicle.

The real answer is ... it depends.
We chose the no muss no fuss, sleep at night option (for us).
It covers all of our base expenses, so what heck.

See my signature block

 

[Dreamer]

I went with the highest survivor benefit for my DH. His family lives longer than mine. However, we plan to do the same for me when he retires.

 

[freebird5825]

Maximize the survivor benefit in both directions, hands down.

Example 1 : I am a widow whose husband passed suddenly while he was still w*rking as a GS-13 Engineer. The survivor benefit defaulted to 100% since he was not retired. The survivor pension is not enough to live on, even in the low cost of living rural area where I reside.
If I had not had my own GS-13 Engineer's salary and my own bank account and my own retirement savings all squared away...it would have gotten ugly for me financially even with no mortgage and no debt at the time.
I was able to FIRE 3 years later because of my OWN lifetime savings habits.

Example 2: I knew a lady who had a much lower salary and lots of joint debt. She was also widowed suddenly. Her story was not so rosy. She is still w*rking and will never see the light of day as far as satisfying those debts goes.

Your situation is somewhat different. But you must consider all worst case scenarios in your decision process.

 

[JOHNNIE36]

When I was getting ready to retire from mega corp, I inquired about this because my father had taken the option where mom would get 100% of his pension if he passed first. Mega corp told me I didn't have an option-that it was set up that I get $XXXX per month and if I passed away first, she gets 50% of that amount for the rest of her life. At one time retirees had options but a lot were electing to take the higher amount and to hell with the wife later so mega corp put a stop to that. I think that was a good move.

 

[Bestwifeever]

If I were to die first, his pension would go back up to the non-spouse option the following month ($843/month)

Do you mean you can choose one of the lower survivor levels and it will revert to the nonsurvivor level if he outlives you? That is very generous of the plan.

We have the 100 percent survivor plan in place for DH's pension; it won't change if I predecease DH, however.

 

[bizlady]

Do you mean you can choose one of the lower survivor levels and it will revert to the nonsurvivor level if he outlives you?

Yes, if I die first, he will get to revert as if I never were to receive anything, so he would go to the $843/month.

 

[youbet]

Yes, if I die first, he will get to revert as if I never were to receive anything, so he would go to the $843/month.

I agree with BestWife, that is generous and unusual. So unusual, in fact, that I'd double check that. That feature makes the decision easy, go with the max spousal benefit.

 

[JonnyM]

We also chose 100 percent survivor benefits, the both of us. The numbers don't really support any other decision, the reduction in benefits is not that significant at the outset and after a few years its long forgotten. Although it was nicer back in the good old days when we would get a couple points a year for a COLA. I suppose the theory is inflation is low so we "shouldn't" need one...

 

[chinaco]

The answer depends on a number factors... expected longevity, what other assets you have (e.g., may not matter to much if you are wealthy). Assuming you are unsure about longevity and not wealthy but have some other assets.... Ideally 100% Joint survivor. At a Minimum 75% joint survivor.

The survivor will lose 1 source of income (a social security check) when the event occurs. The loss of two sources of income will be a real jolt. The difference in the check today between no survivor option and joint 100% is about $1600/year. Look at that as the cost of a deferred insurance for an annuity for the survivor. Insurance is used to mitigate risk (the event may not occur but you still have the risk).

If you have a pension, you should do the same for him.

No matter what you have in terms of income streams and assets, you both need to plan for the loss of income streams when one of you departs. It could mean that you will need to set aside some reserve funds from other assets to fill the gap. If you have some sort of existing insurance policy... that may help.

 

[bbbamI]

Yes, if I die first, he will get to revert as if I never were to receive anything, so he would go to the $843/month.

That's the way DH's pension is set up...the term they use is 'pop'. We went with the max....me receiving 75% if DH dies first.

 

[ziggy29]

We're 16 months out from retiring, and will make a decision late this coming year on which form of pension payout we will take.

DH has a non-COLA pension available at 55. He can take $843 a month for life guaranteed for 60 months (I get nothing on death execpt the balance of the 5 years if he were to die early), $759 for life and I would get 50% of that if he dies, $721 a month and I would get 75%, or $708 a month and I would get 100%.

I haven't gone through this, but I'd probably go for the 75% or 100% options for the security aspect of it.

Having "managed" my mom's taxes and investments since my dad passed, I can tell you that the death of a spouse is a bad enough emotional hit, and the financial hit is salt in the wounds. She lost her SS check when he died, AND she was kicked into the "single" tax filing status. As a result, in 2006 (her first year filing single) her income was almost $10,000 less than it was in 2005, but the change from MFJ to single meant she owed $3,500 more in taxes on $9,500 less income because it kicked her into the 25% bracket AND changed her SS from being 50% taxable to 85% taxable.

Losing my dad's pension would have made the hit even more devastating.

And in reality, if the loss of about $100 a month to get the higher survivor income options would make or break your retirement, you may be cutting it too close to retire anyway, IMO.

 

[ERD50]

How do alternatives stack up to this?

I have not researched this, but how much life insurance could your DH buy for the $135/month difference? Would that be able to replace the survivor benefit?

I will be looking into that before I make the decision for myself and DW.

-ERD50

 

[bosco]

This is probably obvious, but one way to check this is to figure out what life insurance policy you would have to buy to provide the same survivor benefits. If the premium would cost more than your monthly reduction--take the full pension and buy the equivalent policy.

When I went through this drill on my own pension, I concluded that the survivor option was the cheapest insurance I could buy. The other major factor was that without a survivor option, the medical insurance that came with the pension would be cut off to the survivor. But she will have her own. So I had to consider what the value to us of a second policy was.

 

[ziggy29]

How do alternatives stack up to this?

I have not researched this, but how much life insurance could your DH buy for the $135/month difference? Would that be able to replace the survivor benefit?

Well, this would have to be a locked-in $135 monthly premium for life, so presumably it would have to be whole life, not term (since term insurance would either have rising premium or reduced coverage over time). In fact, if the numbers worked in this case (which I haven't checked) it might be one of the few situations in which I'd recommend whole life over term.

 

[freebird5825]

Having "managed" my mom's taxes and investments since my dad passed, I can tell you that the death of a spouse is a bad enough emotional hit, and the financial hit is salt in the wounds. She lost her SS check when he died, AND she was kicked into the "single" tax filing status. As a result, in 2006 (her first year filing single) her income was almost $10,000 less than it was in 2005, but the change from MFJ to single meant she owed $3,500 more in taxes on $9,500 less income because it kicked her into the 25% bracket AND changed her SS from being 50% taxable to 85% taxable.

Excellent post.
I bolded the ONE thing everyone forgets - the change in filing status from married to single.
BTDT and got clobbered myself. It's a good thing I had a salary (not SS) AND an emergency fund to fall back on.

 

[ziggy29]

I bolded the ONE thing everyone forgets - the change in filing status from married to single.
BTDT and got clobbered myself. It's a good thing I had a salary (not SS) AND an emergency fund to fall back on.

And yet it's such an important thing to remember in planning survivor income. In many cases, the widowed spouse will need a considerably higher pre-tax income just to have the same after-tax income. Some life expenses will be cheaper for one person than for two, but it's often not *that* much, and probably not by as much as Uncle Sam will dig deeper into your pockets because your spouse died.

 

[Animorph]

(Edit: missed the page 2 posts, but still a little relevent)

Your expenses will be reduced by about $800/month if DH dies first, so you can almost give up the pension in that case without a big impact on your finances. I think SS will also decrease if you are both getting it, so make sure how your SS survivor benefits will work as well. My understanding is that you will end up with the larger of either SS benefit, but not both. If total SS takes a big drop you may need the 100% survivor benefit. If SS remains the same, I might go with the 50% benefit or maybe 5-year, depending on how the rate of return looked. That gives you the max benefit while you are both alive and protects you adequately if DH dies first.

Also, that non-COLA benefit will make up less and less of your income as you age. That $9600/year savings is going to inflate. So the bottom line will get better with time.

 

[bizlady]

Our SS will be nearly identical- projections are about $7 a month difference, with mine being just slightly higher. SO we will each draw on our own, just not sure if we will take it at 62 or later yet. But you make a good point, as I would lose the pension AND his SS if he goes first.

The insurance ideas posted by others are also interesting and merit consideration. We have a 25 year level term now for just 100k each, (no minor children and no debt) and were going to drop his at retirement and keep the insruance on me, as my husbands expenses would not drop that much if I were to go first. Had not thought about the other way around though...

 

[youbet]

And yet it's such an important thing to remember in planning survivor income. In many cases, the widowed spouse will need a considerably higher pre-tax income just to have the same after-tax income. Some life expenses will be cheaper for one person than for two, but it's often not *that* much, and probably not by as much as Uncle Sam will dig deeper into your pockets because your spouse died.

Either DW or I could live nicely alone on 60% of our combined post tax retirement income. If a couple finds themselves in a position where it takes close to 100% of their combined post tax income for the survivor to carry on alone, they need some help in their retirement financial planning and budgeting.