help with pension options for my MIL

[WM]

I am trying to help my MIL choose the best option for her survivor benefits from my FIL's pension (he passed away a few months ago).

She is 62 and works full-time, and is happy to continue in her job until she can get her own pension at 65, or with SS when she is 66.

Her current expenses are about $1700 per month, house paid off. No debt, and her savings is about $60K. Her take-home is about $2500 per month, and she has medical coverage through work that she can continue when she retires as a supplement to MediCare. Her non-COLA pension will be about $850 per month, and $1000 per month SS.

Pension options (which also allow her to get health coverage if she lost hers):

#1: monthly lifetime (non-COLA) benefit of $684.

#2: reduced monthly payment plus a lump sum. Range from $3755 lump plus $604 per month up to $22535 lump plus $497 per month.

#3: lump sum only of $61k, but that would take away the health care option, which she doesn't want to do. So this one is pretty much off the table.

As far as we can tell right now based on her expenses, she will not need any of the monthly payment at least until she retires, if then. I am inclined to suggest a large partial lump sum, thinking that she could invest it and come out ahead.

However, I also just remembered about taxes and I assume that the pension money will be taxable as ordinary income? Which means the lump sum might not get her ahead after all. Her taxable income is $35K, but she will still file jointly this year because my FIL lived until the end of Feb so has income to report.

Thanks for any suggestions, my brain is a little fuzzy at the moment and I want to make sure I'm not overlooking anything.

 

[crazy connie]

Lump Sum is virtually always available for a Trustee to Trusstee transfer into and IRA. No taxes due until she begins withdrawing funds.

Examine her health and family longevity... these are the biggies in the decision process.

I myself would think the lump of 22K invested in an IRA plus $497 a month to be the most appealing

 

[WM]

Lump Sum is virtually always available for a Trustee to Trusstee transfer into and IRA. No taxes due until she begins withdrawing funds.

Well, that's important information! The letter she got doesn't tell anything about how the taxes work, but hopefully if we call, they can tell us that.

She is in good health (as far as we know, although she hasn't had any regular checkups in who knows how long) and her father died relatively young, but her mother lived into her 90's. So I am wary of inflation problems.

 

[Brat]

Really what she is choosing is between #1 & #2. That no-cola annuity will be worth little in a few years. Take a close look at the health care option conditions for #2 - are there situations where she could loose that if the cost exceeds the annuity amount?

I too like #2 the best given that #3 is not an option, she could roll her lump sum into an IRA and let it grow until she needs it.

I am somewhat confused about her health insurance options. Evidently she has it with her current employer and has available a MediCare suppliment policy after retirement. Does her husband's survivor benefit also provide the option of health insurance should she need to quit work before 65 yoa? Should that happen how much would COBRA cost to bridge her to 65? Explore that availability/cost to bridge her to 65.

If #3 were an option then I would see what income a Vanbuard indexed immediate annuity would generate assuming that the $61T were invested conservitively until her anticipated retirement date and purchased at that time.

 

[chinaco]

You really need to run the numbers on the alternatives for the basic pension and purchasing an annuity somewhere else... or equivalent investment. If she does not have much assets, the pension and/or annuity might be the way to go. Plus.... She should probably delay SS as long as possible to maximize the SS benefit.

One key element is healthcare. If she is waiting till she is eligible for medicare... How valuable is the company plan? How stable is the company and Likely the plan will be around in the next 10 - 15 years?

Compare the company plan to a medicare supplement. You can easily get some quotes. You will need to study the plans. This is a bit tedious...

 

[brewer12345]

Go price a private market immediate annuity to see how much cash she would have to pay to get the payment stream they are offering her. That would be a good starting point for making decisions on lump vs. stream.

 

[WM]

Thanks for the suggestions, I'll be working on this more today.

I am somewhat confused about her health insurance options. Evidently she has it with her current employer and has available a MediCare suppliment policy after retirement. Does her husband's survivor benefit also provide the option of health insurance should she need to quit work before 65 yoa? Should that happen how much would COBRA cost to bridge her to 65? Explore that availability/cost to bridge her to 65.

She has healthcare and MediCare supplement available through her own work/retirement and also the option to enroll in FIL's plan (plan or supplement) if she is fired from her job. She works for a Catholic Diocese (kindergarden teacher) and FIL's policy is through the Ohio Public Employees system. So, both plans are likely to stay around.

From a purely emotional standpoint, she prefers to take #1 (montly payment only), hands-down. They have never had any savings at all, so the 60K that she got from life insurance (her current savings) makes her feel wealthy. Adding a lump sum to that seems pointless to her compared to the "security" of having something that's guaranteed to come in every month. I highly doubt that anything we say will make her feel ok about giving up the monthly payment (and extra healthcare option) and going for the large lump sum (#3). But, numbers showing all the tradeoffs wil be the best bet, so we can probably get her to #2 if the numbers are better.

I think she will be very good at LBYM (my FIL was more the spender) so I think either way she is in relatively good shape. But obviously we'd like to try and get the most from what options she has. I will check into the health care costs and annuity/investment options today...

 

[Brat]

IMHO an annuity that has no COLA is not appropriate for a woman her age, it won't have much purchasing power when she needs it the most. Were I she I would choose a modest income stream now for stable purchasing power through her life.

Were I you I would develop a spread sheet where you enter the current amount of the immediate annuity offered by her husband's employer and the current year (2007), in the next row add a year and multiply the current value by (1-inflation rate). Pick an inflation rate that works for her. Below that repeat the process using the reduced value and add another year. Do that for 20 years, she is likely to live at least that long.

Then I would add a column and enter the amount she would receive if she purchased an indexed annuity with the $61T. Then go through the same compounding illustration multiplying current value by (1+inflation rate).

If she still chooses the employer's annuity at least she will know the consequences.

 

[WM]

Well, this is interesting. After playing with the numbers, it looks to me like she may actually be better off avoiding the lump sums entirely. Because she doesn't need any of the money right now and could invest it all, she comes out ahead by just taking the monthly payment. This is even taking into account that the monthly payments would go into a taxable account.

Initially, she is better off with the 22K lump plus saving the partial monthly payments - this gives her more at age 66 than only investing the full monthly payments.

However, projecting out another 10 years when she can probably still invest all the full payments but would have to start spending some of the partial payments, she ends up with more $ under option 1.

I am comparing this way because I was thinking that taking a partial lump sum would give her an "inflation hedge" if she invested it. But actually, saving and investing the higher monthly payments turns out to be even better, given the tradeoff of getting an immediate 22K and monthly payments that are nearly $200 lower.

Edit: looked into annuities and they appear not to be a good deal in this case - no better than keeping her money invested and using a 4% rule if she needs to withdraw some.

 

[Brat]

Bingo!! That is they type of analysis only a person who knows the individual's circumstances can do. $684 x 12 = $8, 208/yr. If she invests that in a highly rated low-cost no-load balanced fund each year for 10 years she should have inflation protection going forward. Something like Oakmark Balanced would probably do the job.

 

[WM]

Ok, I had to re-figure a little bit - I should be slower to post! But with my now-accurate (at least I think so) calculations, I see that she probably wouldn't need to spend any of the monthly amounts in the first 10 years in either case.

Options 1 and 2 end up coming out roughly even, although the 22K lump would put her ahead if she puts it into an IRA, especially the longer she could leave it in there. Option 3 (just a lump sum) actually comes out to be less than the other two, so that works out fine since she didn't like that idea anyway.

Called the pension people and as long as she is recieving a monthly benefit from them, she can get health care through them - either primary coverage or secondary to MediCare. Cost is another question - she will have to call and answer some questions to get estimates for that.

 

[WM]

Well, after some more serious calculating, it looks like the partial lump sum is the way to go, especially with the IRA as an option. My brother-in-law may need some convincing that the IRA is worth the trouble (he isn't so much a DIY investor) but it's hard to argue in favor of leaving money on the table. We can convert it the first few years she's retired and then hopefully leave it alone as a Roth.

Also, she actually asked the person in charge, and it turns out that she isn't eligible for heathcare through her employer at all once she retires - another important bit of information.

So thanks for the suggestions, and listening to me think out loud!

 

[haha]

Were I she...

Were I you...

Written by a woman with a taste for the English language!

ha

 

[Brat]

Establishing a roll-over IRA for the partial distribution is easy, most here recommend Vanguard or Fidelity. Your IML can work with the person-in-charge to make that happen. One thought: decide what fund she will invest her $$ in and establish an account in that fund management company (for example Oakmark if you choose Oakmark Balanced), after the investment is made she (aka, you) can move the shares to another custodian.

Your MIL's tax bracket probably won't change after she retires. I don't see the advantage of a Roth for her. A regular IRA should work just fine unless you think that she wouldn't be taking required minimum withdrawals after 71 1/2.

Warn her not to have the 'person-in-charge' send her a check for the lump sum. They will withhold 10% for taxes. She wants a custodian to custodian transfer.

HaHa: I barely passed composition in college, a common math major issue. Your comment made my day!!

 

[FinallyRetired]

Reduced lump sum makes sense to me. She would have a little bit put aside for health care problems that weren't covered by medicare or insurance, and still have an income that was low enough to qualify her for medicaid in the future.

 

[WM]

Establishing a roll-over IRA for the partial distribution is easy, most here recommend Vanguard or Fidelity. Your IML can work with the person-in-charge to make that happen. One thought: decide what fund she will invest her $$ in and establish an account in that fund management company (for example Oakmark if you choose Oakmark Balanced), after the investment is made she (aka, you) can move the shares to another custodian.

Ok, good, I was hoping/expecting it wouldn't be too difficult. I like Vanguard myself, and have in mind a target retirement fund for simplicity, so I will be talking to them about how to make that work. Thanks for the reminder about doing a custodial transfer. The other person consulting on this is my brother-in-law (her son) who wants to check with his financial advisor for advice. But the outfit he's with is for high net worth accounts, so I'm not sure how much he'll have to say.

Your MIL's tax bracket probably won't change after she retires. I don't see the advantage of a Roth for her. A regular IRA should work just fine unless you think that she wouldn't be taking required minimum withdrawals after 71 1/2.

Yes, you're right, her tax bracket will be the same. But from what I can tell, she won't need the money that soon, and the simplicity of a Roth is appealing. The traditional IRA was a turn-off for my BIL, at least initially, because of all the rules and extra paperwork. So my thinking is, this way she can keep the tax advantage if she doesn't need the money, and she doesn't have to worry about paying the taxes on the back end.

Reduced lump sum makes sense to me. She would have a little bit put aside for health care problems that weren't covered by medicare or insurance, and still have an income that was low enough to qualify her for medicaid in the future.

Yes, the only thing we can see that would be a serious problem is LTC, so we'll look into insurance possibilities. I know that in some cases the policies aren't necessarily cost-effective. We also need to educate ourselves about how MediCare and supplemental policies work. And Medicaid as well - I thought it was asset-based, not income, so I assumed she wouldn't qualify. More checking to do...

 

[Brat]

In the choice between an IRA and a Roth-IRA pick the one that has the best family sell-through. The worst case is that neither are chosen because of lack of buy-in by a family member for one or the other.

At her income level I think LTC insurance is too expensive (and I am a LTC insurance advocate). One option for her, later, would be to select a CC community that coordinates with Medicaid should the need arise.

 

[WM]

Ok, progress - BIL and I did the spreadsheets and talked things over with MIL, and she is on board with taking the partial lump sum, which from what I can tell will be the best option for her. So far, so good! This is also the off-the-cuff advice she's gotten from a couple other people, which may or may not be worth anything, but makes her feel especially confident with our good advice

Some slight sketchiness as we decide on options for the rollover, as well as a comprehensive financial plan. I came up with suggestions I think are reasonable, BIL is going to talk to his financial advisor, and MIL was put in touch with another FA by someone at work. He is going to come up with a plan for her, but she knows better than to sign anything on the spot and has already confirmed with him that there is no charge for the consultation. So I'll be interested to see what either FA comes up with. Her guy said something like keeping the money in tax-exempt investments for the next five years, not sure where that's headed.

I'll start a new thread when I find out, just for entertainment

 

[Bikerdude]

A quick check at http://www.immediateannuities.com/ says 61K will yield $388/mo. for life non-cola starting at age 65.

 

[Brat]

Were I she I would but my $ in something like Wellington or Dodge and Cox Balanced. Both have a history of managing the down side well with a steady-Edie 10%+ average return. If her annuity payments go directly to her IRA fund custodian in a MM, she can invest that too as she accumulates sufficient sums.

I too would like to hear what the 'advisors' have to day.

 

[WM]

A quick check at http://www.immediateannuities.com/ says 61K will yield $388/mo. for life non-cola starting at age 65.

Thanks for the link! Fortunately, from what we can tell right now, she won't need that money for quite a while, so for now I think she's ok with investing it, and BIL is satisfied that her cash flow is good enough that he's good with investing it also.

Were I she I would but my $ in something like Wellington or Dodge and Cox Balanced. Both have a history of managing the down side well with a steady-Edie 10%+ average return.

Yes, I was thinking either a Target Retirement or if she could handle a little more complexity, US stock, US bond, and international index funds. I'll start a new thread with that when I get the advisor picks for comparison.

If her annuity payments go directly to her IRA fund custodian in a MM, she can invest that too as she accumulates sufficient sums.

The annuity payments she'll get still count as regular income, right? Or are you saying they could be classified as IRA rollover money? Either way, yes, she can definitely be investing this money, especially these next few years while she's still working.

 

[Brat]

The annuity payments will be counted as regular income. She could use that annuity income to increase her current IRA/401k contributions to the max, for example. Or she could invest it outside an IRA. The only difference between IRA/401k savings and personal savings is that the income generated is sheltered until withdrawal in an IRA/401k (increasing the value of compounding over time) and savings in an IRA/401k are usually protected from creditors.

 

[WM]

The annuity payments will be counted as regular income.

Ok, that's what I thought. Since it looks like she won't need the money for a while, I think the IRA is definitely worth it. So far, so good with the creditors - there has not been as much harrassment as we expected, although of course there's been some. I am wondering if it's because there were absolutely no assets and no probate. Or maybe the worst is still coming...

 

[Brat]

If she can max out her sheltered savings there is that much less for creditors to fight over should there ever be an issue.