Mmmm, Numbers

[scwnevada]

Greetings,
Obviously life expectancy is the factor to the following question, however are there any alternatives I should consider in which decision I should make. I'll be 57 and my wife will be 59. I cannot collect SS due to this pension being a Public Employee Retirement System which has cola's and my wife will collect 15K SS at age 62 Which option should I choose? I've waited 27yrs to ask this question

Unmodified - Option 1
No Beneficiary paid
$ 5,761.82 $ 0.00
Option 2
Beneficiary draws upon retired member death
$ 5,209.84 $ 5,209.84
Option 3
Beneficiary draws upon retired member death
$ 5,472.00 $ 2,736.00

 

[skyking1]

Option 2 all the way for us. I take a 16% hit to get 100% for my wife, and you are taking a 10% hit. I'd be all over that. Yours is also a COLA'd pension.
Are you retiring now?

 

[FI_RElater]

I'd have to agree with Skyking....

(option 2 wins hands down; option one fails to provide enough with only her SS (and you should have saved enough so that she could start at FRA or later so as to not take the hit on earlier claiming)... ; option 3, with only a 50% survivor option, clearly fails... you don't get the return for the downside for the surviving spouse)

 

[Gumby]

I will tell you how I might analyze the situation and you can determine whether that makes sense or not for you and your wife.

Your age 57
Wife age 59
No survivor = 5761/mo. + 0/mo.
50% survivor = 5472/mo. + 2736/mo.
100% survivor = 5210/mo. + 5210/mo.
Wife SS at 62 = $1250/mo.

Life expectancy from this Social Security table https://www.ssa.gov/oact/STATS/table4c6.html

You current 24.09 years (I assume you are male)
Wife current 25.63 years
Wife will be 83 if you die at 81. Her expectancy then is 8.09 more years

Calculate the present value of each option as an annuity using this calculator with an interest rate of 4% (the COLA feature allows you to ignore the effect of inflation on this calculation) https://financialmentor.com/calcula...ue of Annuity,This is also called discounting.
The format I use is value until your death at 81 (24.09 yrs) plus value from then to her death at 91 (8.09 yrs later)

No survivor = $1,069,886 +$0 = $1,069,886
50% survivor = $1,016,215 + $228,415 = $1,244,630
100% survivor = $ 967,558 + $434,958 = $1,402,516

From that, I conclude that the 100% survivor benefit (your option 2) has the highest expected present value.

Additionally, assume you die the day after you start taking your pension. If you have the 100% survivor benefit, her life continues along as ever. If you take the 50% survivor benefit, she'll have to get by on 50% of your pension. When I find the cite, I will provide it (I know I've posted it before)**, but the general rule is that household expenses vary by the square root of the number of people in the household. So one person cannot live on 50% as much as two. Rather, she will need about 71% of the income (1/(2^-2)= .707). When social security kicks in at 62, she'll have ~73% of the income (2736+1250)/5472 = .728) But she'll have three really lean years before then (50% income). If you choose no survivor provision, you are condemning her to a lifetime of incredibly lean years (1250/5761 = .22).

Based on the above, the young wife and I each took the 100% survivor provision on our pensions when we retired 3 years ago (at 60 and 58). We have sufficient assets so that the difference in current income is immaterial to us, and it is comforting to know that we have longevity insurance in the form of a survivor benefit.


**EDIT TO ADD SOURCE :
That's the method the Congressional Budget Office uses to normalize household income for comparison purposes; the square root of the number of people in the household.

Because households with identical income but different numbers of people can differ in their economic status, CBO adjusts income for household size by dividing household income by the square root of the number of people in the household.

Source https://www.cbo.gov/system/files/201...old-Income.pdf Appendix A, p. 27

 

[Jerry1]

That’s a great analysis from Gumby. My process was a lot simpler. Why would the surging spouse need any less money? Our differential was small, so it was easy to just look at it and choose the 100% option. But the point is that the surviving spouse is not going to see a 50% drop in expenses, as was pointed out by Gumby. Option 2.

 

[finnski1]

Greetings,
Obviously life expectancy is the factor to the following question, however are there any alternatives I should consider in which decision I should make. I'll be 57 and my wife will be 59. I cannot collect SS due to this pension being a Public Employee Retirement System which has cola's and my wife will collect 15K SS at age 62 Which option should I choose? I've waited 27yrs to ask this question

Unmodified - Option 1
No Beneficiary paid
$ 5,761.82 $ 0.00
Option 2
Beneficiary draws upon retired member death
$ 5,209.84 $ 5,209.84
Option 3
Beneficiary draws upon retired member death
$ 5,472.00 $ 2,736.00

I don't see how you could choose anything but option 2 but I'm putting my own bias in there.
Not only that but by choosing option 2 DW could possibly wait to FRA(approx $1786/month) or age 70(approx $2214/month) to collect SS increasing her benefit substantially.
Thus total could be as high as $7424/month.

 

[jollystomper]

I agree with Option 2 is the best. While I did not take the 100% survivor option, I did take the 75%. 50% would have been too low, but with our assets, expenses, a similar analysis to what Gumby did, and DW getting the max SS survivors benefit possible, 75% worked out as a good option for us.

 

[Magus]

Seems like option 2 is a no brainer unless perhaps you are in wonderful health and the DW is in really poor health.

 

[aaronc879]

Wow, I would retire immediately when eligible and take option 2.

 

[pb4uski]

That’s a great analysis from Gumby. My process was a lot simpler. Why would the surging spouse need any less money? Our differential was small, so it was easy to just look at it and choose the 100% option. But the point is that the surviving spouse is not going to see a 50% drop in expenses, as was pointed out by Gumby. Option 2.

+1 great analysis. For my DB pension we selected 100% J&S (option 2) for peace of mind. Not only that, there is over a 50% chance that one or the other of us will live to our early 90s. And I was skeptical that household expenses to maintain the same standard of livng would be lower for a surviving spouse and I didn't want to see DW short changed.

 

[scwnevada]

Excellent Gumby and everyone else. as for Skyking1, I can buy my time out any day, I'm on year 28 of a 30yr career.

 

[Luvtoride]

One other consideration might be…if you’re in good health to look at purchasing a life insurance policy that could be funded with the difference between your single life pension and the 100% joint option 2. In this way, you maintain control of the full pension amount without taking the Joint haircut. If the value is close to the PV difference per Gumby’s analysis above, this would replace the pension with a lump sum amount, in the unfortunate event of your death. Just another way to look at it.
We considered this option but unfortunately my health did not allow for a reasonably priced policy using the differential in pension payouts.

 

[G-Man]

One other consideration might be…if you’re in good health to look at purchasing a life insurance policy that could be funded with the difference between your single life pension and the 100% joint option 2. In this way, you maintain control of the full pension amount without taking the Joint haircut. If the value is close to the PV difference per Gumby’s analysis above, this would replace the pension with a lump sum amount, in the unfortunate event of your death. Just another way to look at it.
We considered this option but unfortunately my health did not allow for a reasonably priced policy using the differential in pension payouts.

I never thought about that option for my pension. How would you do the math to compare the 2 options (single life pension -vs- life insurance policy)?

 

[Luvtoride]

We have a financial planner who gave us the idea and did the math calculations for us to come up with the estimated value of the life insurance policy needed (based on my life expectancy). For the size of the insurance policy needed and my health issues at 62 years old it just didn’t make financial sense. Yes, they would have benefitted from arranging the policy for us, but we will take a different approach with taking my pension with Joint survivor benefit at 50 or 75% when I retire later this year. Even in that case, my wife would be fine (we are the same age and she has had her health issues as well).
Best of luck.

 

[Koolau]

One other consideration might be…if you’re in good health to look at purchasing a life insurance policy that could be funded with the difference between your single life pension and the 100% joint option 2. In this way, you maintain control of the full pension amount without taking the Joint haircut. If the value is close to the PV difference per Gumby’s analysis above, this would replace the pension with a lump sum amount, in the unfortunate event of your death. Just another way to look at it.
We considered this option but unfortunately my health did not allow for a reasonably priced policy using the differential in pension payouts.

I've heard of this often. The idea gets pooh-pooh'd here though I don't recall the rationale. My take is that some insurance sales person will be taking a nice commission to make it happen. That alone makes me a bit suspicious (in my old age.) YMMV

 

[Scuba]

I will tell you how I might analyze the situation and you can determine whether that makes sense or not for you and your wife.

Your age 57
Wife age 59
No survivor = 5761/mo. + 0/mo.
50% survivor = 5472/mo. + 2736/mo.
100% survivor = 5210/mo. + 5210/mo.
Wife SS at 62 = $1250/mo.

Life expectancy from this Social Security table https://www.ssa.gov/oact/STATS/table4c6.html

You current 24.09 years (I assume you are male)
Wife current 25.63 years
Wife will be 83 if you die at 81. Her expectancy then is 8.09 more years

Calculate the present value of each option as an annuity using this calculator with an interest rate of 4% (the COLA feature allows you to ignore the effect of inflation on this calculation) https://financialmentor.com/calcula...ue of Annuity,This is also called discounting.
The format I use is value until your death at 81 (24.09 yrs) plus value from then to her death at 91 (8.09 yrs later)

No survivor = $1,069,886 +$0 = $1,069,886
50% survivor = $1,016,215 + $228,415 = $1,244,630
100% survivor = $ 967,558 + $434,958 = $1,402,516

From that, I conclude that the 100% survivor benefit (your option 2) has the highest expected present value.

Additionally, assume you die the day after you start taking your pension. If you have the 100% survivor benefit, her life continues along as ever. If you take the 50% survivor benefit, she'll have to get by on 50% of your pension. When I find the cite, I will provide it (I know I've posted it before)**, but the general rule is that household expenses vary by the square root of the number of people in the household. So one person cannot live on 50% as much as two. Rather, she will need about 71% of the income (1/(2^-2)= .707). When social security kicks in at 62, she'll have ~73% of the income (2736+1250)/5472 = .728) But she'll have three really lean years before then (50% income). If you choose no survivor provision, you are condemning her to a lifetime of incredibly lean years (1250/5761 = .22).

Based on the above, the young wife and I each took the 100% survivor provision on our pensions when we retired 3 years ago (at 60 and 58). We have sufficient assets so that the difference in current income is immaterial to us, and it is comforting to know that we have longevity insurance in the form of a survivor benefit.


**EDIT TO ADD SOURCE :
That's the method the Congressional Budget Office uses to normalize household income for comparison purposes; the square root of the number of people in the household.

Source https://www.cbo.gov/system/files/201...old-Income.pdf Appendix A, p. 27

Excellent analysis and very kind of you to do this and share it.

 

[Luvtoride]

I've heard of this often. The idea gets pooh-pooh'd here though I don't recall the rationale. My take is that some insurance sales person will be taking a nice commission to make it happen. That alone makes me a bit suspicious (in my old age.) YMMV

Of course. Koolau, being suspicious isn’t a bad thing as long as we research and understand what we are buying/ implementing for a strategy.

Anything here mentioning life insurance products seems to be dismissed as bad due to sales commissions.

 

[Gumby]

Of course. Koolau, being suspicious isn’t a bad thing as long as we research and understand what we are buying/ implementing for a strategy.

Anything here mentioning life insurance products seems to be dismissed as bad due to sales commissions.

Due to the GPO, my young wife will not receive a Social Security survivor benefit if, as is likely, I predecease her. For that reason, I have a paid up whole life insurance policy to cover the income shortfall when that happens. I was fortunate to get mine through Navy Mutual Aid Association, which doesn't charge sales commissions. I also thought to do it starting in 2002 and it was paid in full in 2017, before we retired.

As you suggest, that also could work to cover a reduced survivor benefit, but you would have to start far enough in advance that health doesn't preclude coverage and the premium is not too high.

 

[Luvtoride]

I was fortunate to get mine through Navy Mutual Aid Association, which doesn't charge sales commissions. I also thought to do it starting in 2002 and it was paid in full in 2017, before we retired.

As you suggest, that also could work to cover a reduced survivor benefit, but you would have to start far enough in advance that health doesn't preclude coverage and the premium is not too high.

Very true, Gumby. Good planning on your part. Alas, we considered it too late to be able to take advantage of this strategy.

We have done other things involving life insurance policies for our grown children that we could tap the cash value if we ever needed it (unlikely) but will provide them with a fully paid up over-funded permanent life policy that they can tap the significant cash value for college costs etc when our grandkids get older.

 

[Phroig]

A life insurance policy frequently works well for estate planning. In your case term life policy might not be sufficient (what term?) and isn’t COLA. Whole life will be expensive. I know more money is always good, but how much will your lifestyle be affected if you take $500 less for the 100% survivor option? If $5,200/month is sufficient, the COLA ensures that both of you will always be OK.

 

[pb4uski]

I never thought about that option for my pension. How would you do the math to compare the 2 options (single life pension -vs- life insurance policy)?

I looked at this as an option and it is an interesting analysis because the longer that the pensioned spouse lives the less is needed as a single sum to buy a SPIA to provide a benefit that is equal to the pension for the surviving spouse.... so the amount of life insurance needed slowly declines over time.

The solution was a term insurance ladder, with 30 year term as a base with a number of increasingly shorter term policies that expire over time as the additional amount of insurance is no longer needed.

See this article: Laddering Life Insurance Policies

At the end of the day, we were better off with the J&S option so that is the way we went.

 

[pb4uski]

I've heard of this often. The idea gets pooh-pooh'd here though I don't recall the rationale. My take is that some insurance sales person will be taking a nice commission to make it happen. That alone makes me a bit suspicious (in my old age.) YMMV

Yeah, paranoia is hard when you get old. If it is done with term life insurance commissions are not much of an issue. It probably isn't much of an issue for whole life either... where commissions impact whole life is the cash surrender values which tend to be nil for the first 3-5 years and then start increasing... eventually equal to the insured amount at some advanced ages.

 

[pacergal]

We also chose J&S 100% option for both of our pensions. I ran calculators backwards and forwards with our pension payout choices (over 10!).
100% just seemed easier, more strait forward for planning. Same income plus small cola for both our lives--easier on the budget planning.

 

[G-Man]

I looked at this as an option and it is an interesting analysis because the longer that the pensioned spouse lives the less is needed as a single sum to buy a SPIA to provide a benefit that is equal to the pension for the surviving spouse.... so the amount of life insurance needed slowly declines over time.

The solution was a term insurance ladder, with 30 year term as a base with a number of increasingly shorter term policies that expire over time as the additional amount of insurance is no longer needed.

See this article: Laddering Life Insurance Policies

At the end of the day, we were better off with the J&S option so that is the way we went.

I know my numbers for the single life pension, 100%, 75%, and 50% survivorship.

How can I go about performing the analysis?

 

[Koolau]

I know my numbers for the single life pension, 100%, 75%, and 50% survivorship.

How can I go about performing the analysis?

Heh, heh, if you feel comfortable presenting the numbers here, one of our math majors (definitely, not me) will probably show you how.

I picked the lowest level of survivorship (25% in my case) BUT waited until 70 to take SS so the DW would have MY SS upon my death. We did not do any number crunching - just eye-balled it, so to speak. YMMV