My coworker's argument on spousal annuity value--

[swampmaple]

Something about this logic bothers me, but I can't put my finger on it:

Basically, my co-worker says the spousal annuity option offered in the CSRS retirement system (with full COLA) is a great value because it is calculated on a "one time reduction to your base" and "not a percentage." For example, if your base retirement yearly annuity is $76,000, the survivor benefit can be fully funded if you reduce your base about $7,000; so your pension becomes $69,000 in year one.

My co-worker says since that $69,000 will be getting COLAs year after year, and the $6,000 was a "one time" reduction, the cost of the spousal annuity eventually becomes very cheap - say in year 20 the annuity has risen to $100,000+ per year but the spousal annuity "is still $6,000."

But wouldn't that $6,000 in year one, if one considers it too would have been COLAd each year essentially be worth more than a straight $6,000 multiplied by 20?

The CSRS spousal annuity option is a great value in many ways, but is really "not a percentage", so that it becomes a better value as time goes on? (Just in the sense that x amount of money provides for spouse if I die, not considering the actuarial likelihood(s) of someone actually using it.)

 

[Brat]

Everyone has their own approach to figuring this out. If his wife has a condition that makes her less likely to outlive him then it is worth a discussion. Otherwise I would let it go.

 

[mb]

I think you are correct in questioning your friend's logic. That's not the way the math works.

First assume that the COLA exactly matches your friend's cost of living increase.

Then in TODAY'S DOLLARS he will receive $76k/year EVERY YEAR without survior benefits and $69k/year EVERY YEAR with survivor benefit.

Another way to do it is to just plug the numbers into a spreadsheet and multiply the starting values by (1+x)^n where x is the COLA adjustment and n is the number or years for each year of retirement.

But I think that the real issue is does your friend need to provide for his spouse if something happens to him?

MB

 

[Gone4Good]

Yes, the logic is flawed.

In your example, the $69,000 reduced benefit is 91% of the original $76,000 benefit.

In year 20 (at 3% annual COLA), the reduced benefit would grow to $124,622 and the original $76,000 would grow to $137,264. In year 20 the reduced benefit is still 91% of the original benefit.

 

[grumpy]

Swamp,

Just wanted to be sure you realize that this discussion could be moot because in order to elect anything but the full survivor benefit under CSRS, the potential survivor must sign off on it. I know that a few years ago when I was facing that decision my DW would not have accepted the logic of ANY argument suggesting less than the full survivor annuity for her.

Grumpy

 

[donheff]

Swamp,

Just wanted to be sure you realize that this discussion could be moot because in order to elect anything but the full survivor benefit under CSRS, the potential survivor must sign off on it. I know that a few years ago when I was facing that decision my DW would not have accepted the logic of ANY argument suggesting less than the full survivor annuity for her.

Grumpy

Damn right. Swamp - put the shoe on the other foot. If your spouse was making the decision to save a few thousand bucks a year and that meant that should that spouse die (which happens all the time) you would loose a substantial, lifetime, COLAd pension, what would you say?

As to the co-worker, tell him to take remedial math. Of course, the 10% reduction would grow with inflation. But forget that. The survivor annuity is essential unless you can demonstrate how you will at least match it if the event you die. (In another thread, someone on this board had done some careful planning that included a term life insurance policy and seemed to have at least an argument that he had his bases covered.)

 

[Patrick]

Damn right. Swamp - put the shoe on the other foot. If your spouse was making the decision to save a few thousand bucks a year and that meant that should that spouse die (which happens all the time) you would loose a substantial, lifetime, COLAd pension, what would you say?

This very thing happened to someone I used to work with. He convinced his wife to sign off so they could get the "max" payout, then he died of a heart attack within 30 days of retiring. HR was able to go back to the pension supervisors and get them to change the payout so that the widow would have her lifetime pension, but it was a giant hassle.

 

[2B]

I was with a company that got taken over after I had been with them 18 months. Because of the takeover, we were all vested in our pensions. I got a letter asking me to decide if I wanted to take $138.00 per month when I turned 65 or $69.00 per month with a 50% survivor benefit. That seemed an absurd reduction and for such a small amount I thought it was stupid. I signed for the full benefit without survivor benefit and my wife gave me crap about that for months. That was decades ago so I hope she's forgotten.

 

[Patrick]

I was with a company that got taken over after I had been with them 18 months. Because of the takeover, we were all vested in our pensions. I got a letter asking me to decide if I wanted to take $138.00 per month when I turned 65 or $69.00 per month with a 50% survivor benefit. That seemed an absurd reduction and for such a small amount I thought it was stupid. I signed for the full benefit without survivor benefit and my wife gave me crap about that for months. That was decades ago so I hope she's forgotten.

That is an outrageous reduction. There's no way is should be that much (unless you robbed the cradle ).

 

[burch64]

I have an Uncle who retired from the Post Office 30 years ago, he took the reduced pension so his Spouse would have an income if he died first.

She recently died first, he said his pension would increase by $1,000 per month now that she is gone.

He gave up a lot of money over 30 years and even if he had of died first she may have only gotten his pension for a few years. In their case it was not worth it, but who knows?

 

[Cut-Throat]

I was with a company that got taken over after I had been with them 18 months. Because of the takeover, we were all vested in our pensions. I got a letter asking me to decide if I wanted to take $138.00 per month when I turned 65 or $69.00 per month with a 50% survivor benefit. That seemed an absurd reduction and for such a small amount I thought it was stupid. I signed for the full benefit without survivor benefit and my wife gave me crap about that for months. That was decades ago so I hope she's forgotten.

Actually what you can do, is check into the cost of life insurance. that's essentially what you are paying for. If it's an absurd amount, the life insurance should be cheaper.

 

[donheff]

He gave up a lot of money over 30 years and even if he had of died first she may have only gotten his pension for a few years. In their case it was not worth it, but who knows?

I bolded your last sentence because that is the key. Who knows? It does not make sense to say in their case it was not worth it because the value is decided at the outset when the decision is made, not at the end when hindsight is 20/20. If your uncle had died a month after he retired your aunt might have been living at your house for 30 years.

I can't understand how people who purport to love their spouses can play dice with their retirement years over a modest reduction in current income. Unless, the finances are such that your pension just doesn't matter it seems outrageous.

Here is a thought experiment for you guys (and it does seem to be guys) who would skip the spousal annuity:
Lets assume for the sake of the argument that inflation protected annuities were clearly an excellent value. You and your wife decide to invest $1M in an SPIA? The income will cover all of your expenses and your social security will provide some mad money. You and your wife are the same age and both in excellent health.

Your wife wants to take out a single life annuity in her name since the income will be higher and everyone knows women outlive men. Do you agree?

 

[burch64]

I can't understand how people who purport to love their spouses can play dice with their retirement years over a modest reduction in current income. Unless, the finances are such that your pension just doesn't matter it seems outrageous.

I highlighted modest in your reply because it is not always modest, where I retired it was a 20% reduction in my pension plus my COLA would also be reduced over the years.

If you have a working spouse with a pension of their own and SS their retirement may not depend on your pension.

Most people who retired from where I worked did not feel that the spouse benefit was a good deal and chose to buy term insurance to cover for their wives.

The only people who chose the spousal benefit were people with non working wives that had no retirement benefits of their own.

I think it boils down to a personal choice and what your paticular circumstances are.

 

[youbet]

I can't understand how people who purport to love their spouses can play dice with their retirement years over a modest reduction in current income.

OP simply wanted a logic check on his friend's determination of the future value of the annuity reduction caused by choosing the annuity with suvivorship. Nothing was asked about the moral or economic consequences of the action one way or the other.

Whether to choose survivorship or not depends on your overall financial situation as a couple and your forecast of life's future events as well as the cost of the survivorship option.

Your example uses details which favor taking the survivorship option. Scenarios can easily be fabricated which favor not taking the survivorship option. For example, where the survivorship option is very expensive, the pension/annuity is non-cola'd and the couple has sufficent resources for the survivor to live quite comfortably without receiving the survivor pension/annuity from the deceased.

IMO, the mistake would be to blindly make a decision without looking at the numbers and overall life situation.

 

[youbet]

She recently died first, he said his pension would increase by $1,000 per month now that she is gone.

So that no confusion is created, this would be very unusual. Normally pensions reduced by choosing the survivorship option DO NOT revert to the higher single annuity amount if the beneficiary dies first. In most cases, your uncle's pension would have remained reduced forever.

Read the details when making these decisions.

 

[grumpy]

So that no confusion is created, this would be very unusual. Normally pensions reduced by choosing the survivorship option DO NOT revert to the higher single annuity amount if the beneficiary dies first. In most cases, your uncle's pension would have remained reduced forever.

Read the details when making these decisions.

I'm pretty sure that this IS the case with CSRS pensions, which is what the OP was asking about.

Grumpy

 

[youbet]

I'm pretty sure that this IS the case with CSRS pensions, which is what the OP was asking about.

Grumpy

Thanks Grumpy. I didn't know about CSRS pensions and that unusual provision. That would certainly be an important factor in deciding whether to go with the single annuity or with the spousal survivorship. That provision, all other things being equal, would tend to make me lean towards the survivorship option. Wish I could get that with a private sector pension!

 

[bosco]

I'm in the opposite position. DW argues against the joint annuity payout on my pension, and I tell her I'm unwilling not get a joint annuity unless we buy term life insurance on my life to compensate (which would cost more). She's an eternal optimist. If I try to hit her with the "what ifs" she says "I plan on keeping you alive." I love the woman dearly, but won't make financial decisions based on that kind of thinking.

In my case, there is a "2/3 last surviver" option that only costs 3.3% of the pension amount. When one person dies, the survivor gets 2/3. This makes some sense to me, and it is cheaper than the other joint options, which continue with the pensioner at 100% but give the joint annuitant survivor either 50% or 75% (there is no full benefit option for the joint annuitant).

But the option she is pushing for is called the "level income option" in which you receive approximately an 18% increase in the pension payment from age 55 to 66 (social security age), then take a 23% hit on original payment thereafter. The logic was to knock your income down when it was time to receive SS in hopes of avoiding the windfall elimination tax. Afer downloading the full-blown SS calculator, however, it doesn't change the windfall tax one bit. And the level income option cannot be taken with a joint annuity. If I calc it out on a spreadsheet, it does work out better up to about age 85 or so. But the marginal benefit is not worth the lack of the joint annuity, and I just plain won't select it.

The last thing I want to think about as I'm screaming down the road on my motorcycle in retirement is that if I wipe out, my wife loses most of her income.

 

[donheff]

I highlighted modest in your reply because it is not always modest, where I retired it was a 20% reduction in my pension plus my COLA would also be reduced over the years.

If you have a working spouse with a pension of their own and SS their retirement may not depend on your pension.

Whether to choose survivorship or not depends on your overall financial situation as a couple and your forecast of life's future events as well as the cost of the survivorship option.

Your example uses details which favor taking the survivorship option. Scenarios can easily be fabricated which favor not taking the survivorship option. For example, where the survivorship option is very expensive, the pension/annuity is non-cola'd and the couple has sufficent resources for the survivor to live quite comfortably without receiving the survivor pension/annuity from the deceased.

I have no argument with either of these of these points. I noted in my post that I thought people should take the option unless their finances made the pension unnecessary a situation both of these posts posit.

I would also agree that some pensions may make survivorship options too skimpy and too costly to be worth bothering with. I was thinking of the CSRS system since that is what the OP posted about, albeit my response was not qualified.

People who do not select the survivor annuity in these circumstances are, of course, not ready to ER until their finances are such that the spouse is financially prepared if the pension holder dies early.