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Pension Survivorship Options?
Old 12-18-2016, 11:25 PM   #1
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Pension Survivorship Options?

I am curious about the pro's and con's regarding the survivorship options on my wife's pension plan. They offer 100%, 67%, 50%, and 0% survivor options. We're both in good health, but I am five years older than my wife. While the odds of her dying before me is slim, it's obviously a possibility.

I don't know that I could survive on my own without her pension, so the 0% option is out.

I'm also sure I could get by with less if it were just me, so I don't see a need for 100% survivor coverage.

Selecting the 67% survivor coverage would increase our monthly payments about $200/month (compared to the 100% option). Choosing the 67% option would probably allow us to retire a full year earlier.

The 50% option only increases the monthly income another $100 per month. While I could probably survive on half of her pension, in addition to SS and my IRA, it might be cutting it close if there are two many unknowns in the future (health problems, etc.)

So, 67% seems like the smarter option, but I'm curious what advantages/disadvantages I may not be considering.
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Old 12-18-2016, 11:41 PM   #2
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Does she not have a 401K and IRA herself that you would inherit when she died ?

Who has the higher SS value, have you started to collect SS yet ?
Will the one with the larger SS wait until age 70 ?

The basic answer I would give is based on you being 5 yrs older and male, that since you could get by on 50% that is what I would chose since odds are very much she will live on and you both benefit from the extra pension money every month.
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Old 12-18-2016, 11:56 PM   #3
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Does she not have a 401K and IRA herself that you would inherit when she died ?

Who has the higher SS value, have you started to collect SS yet ?
Will the one with the larger SS wait until age 70 ?

The basic answer I would give is based on you being 5 yrs older and male, that since you could get by on 50% that is what I would chose since odds are very much she will live on and you both benefit from the extra pension money every month.
My wife will receive a pension, but does not have a 401K or IRA. I have an IRA in my name.

We're still ten years away from an early retirement. I'm just trying to research the pro's and con's of each survivorship option.
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Old 12-19-2016, 12:17 AM   #4
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So one consideration would be for the one who will get the higher SS , to delay getting it until age 70 as that provides the largest payout for a couple since odds are high one of the couple will live to age 90 or more.
By opting that way, then you can go for the lower survivor pension payout since you will get a higher SS payout.

I'm kinda suprised your wife has no 401K or IRA, but I guess if your income is so low (although both work) then that would be why. Even married couples where wife does not work can have wife sock away $$$ in an IRA
If your tax bracket is low already, then using a ROTH instead of IRA would be better, since the tax deduction is not much benefit when going from low to low brackets.
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Old 12-19-2016, 02:03 AM   #5
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You’re raising some decent questions. Note, I didn’t say concerns. I keyed on your comment that you are still a decade away from retirement. That is still some time to go. SO many things can change in that time…health, employment, family issues etc. The specifics of your question are valid but, to me, a little down into the weeds. Is there a cost of living adjustment (COLA) involved in these amounts? I think interest rates will be rising and the figures you are using may change significantly over the next ten years (in your favor). Have you looked at your rate of return? What might happen to inflation over the next 10 years?
The questions raised above (SS etc) are also related to a complete answer. All this stuff I’m throwing your way should not concern you. None of this is Rocket Science. You may get more questions than answers with your thread but THAT IS WHAT YOU WANT.
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Old 12-19-2016, 05:16 AM   #6
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If you both worked you will each be getting your own SS while you both are alive.

After the first one passes, you will only receive one SS check. If you both worked full careers, the hit in SS could be significant especially since SS is inflation adjusted and most corporate pensions are not.

I certainly would not want the surviving spouse in our marriage to have to limit activities after a death as I feel that staying engaged with society is very healthy as we age. Having more money available will facilitate that.

As such, we are looking into 100% survivorship options on our pensions.

-gauss
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Old 12-19-2016, 05:36 AM   #7
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Given the difference in your ages and normal life expectancy, the odds of you needing your wife's pension are low, as you said. An option would be to choose the 0 or 50% option, but save the increase in the payment as your buffer against the risk.
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Old 12-19-2016, 06:06 AM   #8
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Quote:
Originally Posted by mountainsoft View Post
I am curious about the pro's and con's regarding the survivorship options on my wife's pension plan. They offer 100%, 67%, 50%, and 0% survivor options. We're both in good health, but I am five years older than my wife. While the odds of her dying before me is slim, it's obviously a possibility.

I don't know that I could survive on my own without her pension, so the 0% option is out.

I'm also sure I could get by with less if it were just me, so I don't see a need for 100% survivor coverage.

Selecting the 67% survivor coverage would increase our monthly payments about $200/month (compared to the 100% option). Choosing the 67% option would probably allow us to retire a full year earlier.

The 50% option only increases the monthly income another $100 per month. While I could probably survive on half of her pension, in addition to SS and my IRA, it might be cutting it close if there are two many unknowns in the future (health problems, etc.)

So, 67% seems like the smarter option, but I'm curious what advantages/disadvantages I may not be considering.
You should sit down and run a budget, including taxes, to determine how much you really need. Fixed costs, such as home ownership and maintenance, are the same for one or two. When one spouse passes away the tax rate increases on the income stream. These two factors alone might point to a surviving spouse needing more than estimated.
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Old 12-19-2016, 06:25 AM   #9
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Since you are ten years away from ER, why not start contributing to an IRA for your wife?
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Old 12-19-2016, 07:17 AM   #10
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I would look at expenses as you approach pulling the plug and evaluate the impact on lifestyle if she was to die in an accident soon after you retire. The Federal pension does not offer a 100% option, the top level is 55%. I assume some actuaries calculated that one can live cheaper than two but I think 55% is a bit low.
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Old 12-19-2016, 07:42 AM   #11
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I guess I believe in equalizing the cash flow. We have established a life-style well within our SS + pension income. I set my husband's widow benefits as high as I could and deferred SS to age 70. If I died today his income from SS and pension would drop 5% and if he died today mine would drop 15% (the options on my income were better and the higher earner doesn't get a SS boost). Of course this really makes the individual income tax very high too.


Usually the price paid for maximizing the survivor is a relatively inexpensive insurance policy. If not, minimize the spousal and use the money to buy an insurance payout that would preserve the spousal income for the remainder of his/her life.
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Old 12-19-2016, 07:44 AM   #12
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I would look at expenses as you approach pulling the plug and evaluate the impact on lifestyle if she was to die in an accident soon after you retire. The Federal pension does not offer a 100% option, the top level is 55%. I assume some actuaries calculated that one can live cheaper than two but I think 55% is a bit low.
I think FERS is 50%, and I agree it is a bit low. But previously available SS tricks helped me compensate.
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Old 12-19-2016, 07:50 AM   #13
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I certainly would not want the surviving spouse in our marriage to have to limit activities after a death as I feel that staying engaged with society is very healthy as we age. Having more money available will facilitate that.

As such, we are looking into 100% survivorship options on our pensions.

-gauss
This was my thinking as well. When I started my pension I picked the 100% survivor option. My wife is 7 years younger than I and going from 67% survivorship to 100% reduced the pension payment by about 9%. Seemed prudent and she wouldn't have been very happy if I went the 67% route.
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Old 12-19-2016, 08:05 AM   #14
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I did the 100%,since there might be a good possibility the wife could
live to 100, her grandmother went to 100.

At 72 she still does Zumba 3-4 times a week with the 20 and 30 year
olds. This is not the senior Zumba. How she keeps up with them I have no clue.

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Old 12-19-2016, 08:17 AM   #15
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This was my thinking as well. When I started my pension I picked the 100% survivor option. My wife is 7 years younger than I and going from 67% survivorship to 100% reduced the pension payment by about 9%. Seemed prudent and she wouldn't have been very happy if I went the 67% route.
We did 100% because financially it made sense. It was the cheapest insurance we could get and the decision does not have to be made until the pension is about to begin (or she quits with a deferred pension).

So relax. Time is on your side
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Old 12-19-2016, 08:58 AM   #16
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We did 100% because financially it made sense. It was the cheapest insurance we could get and the decision does not have to be made until the pension is about to begin (or she quits with a deferred pension).

So relax. Time is on your side
This is basically what the calculation is. The difference in pension payout is the premium you pay for life insurance on the primary pensioner in an amount that would be sufficient to buy an annuity that pays out the same amount as the survivor benefit. I suppose it is possible that one could buy life insurance for less than the amount of the difference, in which case, it doesn't make sense to elect a survivor benefit. This risk of course is that you might not be able to buy life insurance at all.
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Old 12-19-2016, 09:34 AM   #17
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This is basically what the calculation is. The difference in pension payout is the premium you pay for life insurance on the primary pensioner in an amount that would be sufficient to buy an annuity that pays out the same amount as the survivor benefit. I suppose it is possible that one could buy life insurance for less than the amount of the difference, in which case, it doesn't make sense to elect a survivor benefit. This risk of course is that you might not be able to buy life insurance at all.
Right. Another way of looking at it is you are foregoing an annuity of 9% of my pension starting at age 62 in order to buy an annuity on my DW (7years younger) equal to about .24% (.91-.67). She is likely to live about 10 years longer than me. Seemed like a good enough deal especially since we didn't really need the extra pension in any event.
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Old 12-19-2016, 10:00 AM   #18
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one consideration would be for the one who will get the higher SS , to delay getting it until age 70 as that provides the largest payout for a couple
From the rough calculations I've done so far, it looks like we'll probably need to start taking hers when she is 65 to avoid draining my IRA too quickly. My SS doesn't amount to much, so there's not much financial benefit to waiting to take it.

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I'm kinda surprised your wife has no 401K or IRA
She works for the county and is part of Washington State's Retirement plan. They do not offer a 401K.

When we started an IRA we put it in my name since the pension was in her name. We are currently maxing out contributions to my IRA ($6500/year). We've thought about starting another IRA in her name, but don't think we can afford to save any more to contribute to another IRA.
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Old 12-19-2016, 10:02 AM   #19
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We had a similar dilemma. We went with a percentage joint survivor.

Prior to doing so we looked at the option of going with no joint survivor, and certain percentages of joint survivor and then using the additional funds, net of income tax, to purchase term life for sixty percent of the original commuted value . It was better for us to go joint.
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Old 12-19-2016, 10:11 AM   #20
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I keyed on your comment that you are still a decade away from retirement. That is still some time to go. SO many things can change in that time…health, employment, family issues etc. The specifics of your question are valid but, to me, a little down into the weeds. Is there a cost of living adjustment (COLA) involved in these amounts?
Yep, retirement is still at least ten years out, but I'm trying to use these years to educate myself and look at all the possibilities. As you say, a lot can change in ten years. I have run a variety of calculations each of the last two years, and every year the situation is different (for the better, thankfully).

My wife's pension does include a cost of living adjustment. I think SS includes cost of living increases too doesn't it?

We would like to be able to save more, but at the same time we want to make the most of life now while we're still in good health and able to be active. We have a limited income so our spending is limited too, but as you hinted a lot could change in ten years.
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