Pension Choice to Make

[Niuatoputapu]

DW must make a pension choice within 30 days. Was fairly sure which option we were going to choose (#2), but about to make last minute decision to keep option #3 because the differential benefit between #2 and #3 is smaller than anticipated. The correct choice requires a crystal ball for death dates.

DW is 65, DH is 64. Both in good health (knock on wood) and both have parents who lived into their upper 80's.

Pension is a CA school pension, annually inflation adjusted. The unadjusted for inflation numbers follow. Our choices are:

1) $31,721/year for DW for life, no survivor benefits

2) $29,704/year for DW. If DH dies first, benefit goes to $31,721, if DW dies first, DH will receive $14,852 for life (50% survivor option)

3) $29,063/year for DW. If DH dies first, benefit goes to $32,021. If DW dies first, DH will receive $29,063 for life (100% survivor option)

If we both survive many years, all three options work for us. If either spouse meets an early demise, option #3 seems to be the best choice for either surviving spouse. We had hoped the option #2 benefit would have been larger making it a difficult choice between #2 and #3, but it isn't.

Are we missing anything?

 

[GreenER]

We are less than a year apart in age and had planned on taking full survivor's benefits all along on a pension of similar size, though without a COLA. We were also surprised by the small difference it ended up being between the 50% and 100% survivor's benefits. It seemed to make it even more of an easy choice to opt for full survivor's benefit for peace if mind.

DW must make a pension choice within 30 days. Was fairly sure which option we were going to choose (#2), but about to make last minute decision to keep option #3 because the differential benefit between #2 and #3 is smaller than anticipated. The correct choice requires a crystal ball for death dates.

DW is 65, DH is 64. Both in good health (knock on wood) and both have parents who lived into their upper 80's.

Pension is a CA school pension, annually inflation adjusted. The unadjusted for inflation numbers follow. Our choices are:

1) $31,721/year for DW for life, no survivor benefits

2) $29,704/year for DW. If DH dies first, benefit goes to $31,721, if DW dies first, DH will receive $14,852 for life (50% survivor option)

3) $29,063/year for DW. If DH dies first, benefit goes to $32,021. If DW dies first, DH will receive $29,063 for life (100% survivor option)

If we both survive many years, all three options work for us. If either spouse meets an early demise, option #3 seems to be the best choice for either surviving spouse. We had hoped the option #2 benefit would have been larger making it a difficult choice between #2 and #3, but it isn't.

Are we missing anything?

 

[finnski1]

Well not knowing anything else about your situation, #3 looks like a no brainer to me.

 

[CardsFan]

Option 3 is a no-brainer, IMHO.

But I do wonder how the numbers are put together. They don't seem to make any actuarial sense to me.

 

[MissMolly]

We had the identical 3 choices (with different numbers, of course) and chose Option #3. To me, this was a no-brainer given the insignificant difference much like yours. Regardless of which one of us survived, the pension is a solid leg of our 3-legged stool and I wanted to preserve that opportunity for the higher amount for my husband should I predecease him.

 

[finnski1]

Option 3 is a no-brainer, IMHO.

But I do wonder how the numbers are put together. They don't seem to make any actuarial sense to me.

Yeah I was surprised by that too. When DW did the 100% J&S it was about a 18% haircut from the individual number. Though I am 3 years younger.
This is only about 8% I'd take that!

 

[pacergal]

My vote is #3, for sure.

 

[old medic]

I'm facing an almost identical choice in a few months, and we are leaning heavy to your choice #3

 

[PandaBear]

I also will have a CA school pension and we decided immediately that our version of #3 is the best option. You give up little to protect your spouse with a lifetime annuity.
I wouldn’t even be thinking about it.

 

[Telly]

Are the numbers in choice #3 correct? I can't figure out why if DW selects Option 3, the 100% Survivor option, and DH kicks the bucket first, why DW's payout increases to $32,021, and not the $31,721, which I assume is the "Standard" annuity amount.

 

[Niuatoputapu]

But I do wonder how the numbers are put together. They don't seem to make any actuarial sense to me.

I don't have any actuarial sense either, but maybe the following helps explain the situation. CA teacher pensions require employee contributions. DW contributed about 8% of her salary for 19 years towards the pension (and 0% into SS over the same period). The employee contributions, I believe, are refundable. In her case, she recoups her contributions after 3 or 4 years of pension receipts. I did not complicate my question with "what if she dies within those 3-4 years" possibilities, but this additional information may be what causes my question to not make actuarial sense.

 

[Niuatoputapu]

Are the numbers in choice #3 correct? I can't figure out why if DW selects Option 3, the 100% Survivor option, and DH kicks the bucket first, why DW's payout increases to $32,021, and not the $31,721, which I assume is the "Standard" annuity amount.

We chose option #3 in 2011 and let it ride until now. We now have 30 days to keep it or change it. $32,021 is the standard annuity payment. The $31,721 amount includes a $300 annual "assessment" for changing our minds.

 

[pb4uski]

DW must make a pension choice within 30 days. Was fairly sure which option we were going to choose (#2), but about to make last minute decision to keep option #3 because the differential benefit between #2 and #3 is smaller than anticipated. The correct choice requires a crystal ball for death dates.

DW is 65, DH is 64. Both in good health (knock on wood) and both have parents who lived into their upper 80's.

Pension is a CA school pension, annually inflation adjusted. The unadjusted for inflation numbers follow. Our choices are:

1) $31,721/year for DW for life, no survivor benefits

2) $29,704/year for DW. If DH dies first, benefit goes to $31,721, if DW dies first, DH will receive $14,852 for life (50% survivor option)

3) $29,063/year for DW. If DH dies first, benefit goes to $32,021. If DW dies first, DH will receive $29,063 for life (100% survivor option)

If we both survive many years, all three options work for us. If either spouse meets an early demise, option #3 seems to be the best choice for either surviving spouse. We had hoped the option #2 benefit would have been larger making it a difficult choice between #2 and #3, but it isn't.

Are we missing anything?

No, given those choices, I would go option #3, but we took 100% survivor option for my pension so I may be biased.

For reference, from immediateannuities.com a joint life annuity paying $29,088 a year would pay $33,180 if sole life so the joint life benefit is 87% of the sole life.... your deal is over 91% so it seems good.

 

[Dalmore]

We just made this decision in December of 2020 (CalPers). We decided to take Option #1 - No survivor benefit. Then found two life insurance policies, one 15 years and one 25 years, the total benefit from both policies would be approximately what we would get from the pension over time. After 15 years, we will let that policy expire, as the pension would have "paid out" that amount, and our rates will be lower for the last 10 years. We save about $5,000 per year for the first 15 years doing it this way. We save even more over the last 10 years. And if I die first, DW can cancel the policies.

 

[Niuatoputapu]

We just made this decision in December of 2020 (CalPers). We decided to take Option #1 - No survivor benefit. Then found two life insurance policies, one 15 years and one 25 years, the total benefit from both policies would be approximately what we would get from the pension over time. After 15 years, we will let that policy expire, as the pension would have "paid out" that amount, and our rates will be lower for the last 10 years. We save about $5,000 per year for the first 15 years doing it this way. We save even more over the last 10 years. And if I die first, DW can cancel the policies.

Congratulations for successfully using that strategy to save about $5,000/year. For us, the income difference between option #1 and #3 is only $2,658/year - not a lot of money to buy life insurance policies AND save money. That said, we will solicit some LI quotes for a 65-year-old woman and see if there is anything in there for us. Thanks.

 

[TheWizard]

OP needs to looks at other assets as well, especially tax-deferred accumulations.
Folks here often worry about the survivor being in a higher tax bracket after the first one dies. (I'm single and don't agree with this concern particularly.)

Anyhow, one good way to avoid this problem for the survivor is to have pensions that stop when the first to go does.
Just something to think about with OP's particular numbers...

 

[Jim59]

Congratulations for successfully using that strategy to save about $5,000/year. For us, the income difference between option #1 and #3 is only $2,658/year - not a lot of money to buy life insurance policies AND save money. That said, we will solicit some LI quotes for a 65-year-old woman and see if there is anything in there for us. Thanks.

Can you explain to me the $5,000/ year saving please ? I’m sure it’s quite clear but U cannot see it ?

 

[Niuatoputapu]

Thank you to everyone for your responses. We will go with Option #3 - the 100% survivor benefit. Thanks to the suggestion, I did investigate the "Option #1 with Life Insurance" concept but it did not make sense for us. One knowledgeable insurance agent noted that the only 9% reduction from the full annuity amount is generous and that coupled with the potential insured's age of 65 makes it difficult for the life insurance option to be better for us. If the haircut were 18% (as someone mentioned) and the insured were 55, the "Option #1 with Life Insurance" would pencil much better.