Pensions & Death

[Dalmore]

I'm curious what the general consensus is here.

I retired in June and DW retired last month.

DW gets a COLA pension from the state that will cover 80% ($100K/yr) of our day-to-day needs and we have $2.5M in assets. Target WDR is about 2.5% to cover travel, medical, and fun spending. We have the option to hold out about $9000 a year to protect the pension in the event that she dies before me, continuing the benefit to me at 50%. I am 55 and she is 61. Neither of us has any known health issues, and on her side most of her female relatives have lived to 90+. My side, most have lived into their mid 80s. I am the saver/planner who got us to FIRE, whereas she is the spender with a shoe and clothes fetish. I will get the larger SS, and am planning to wait until 70 to take it.

Fixed expenses are minimal. No mortgage. Utilities under $70 a month. Food and entertainment is $2000/mo. Insurance is $1000/mo. Misc expenses (gym, pets, hobbies, car & house maint) around $3500/mo. Discretionary spending (mostly DW's) around $2500/mo.

I am a bit of a gambler and inclined to wave the option of continuing the pension should she die - keeping $800/mo in our pockets for life. If we don't take the option, then I get nothing if she dies. Worst case scenario is DW gets Covid in January and dies.

What would you do?

 

[Brat]

Without running the numbers I would go with the survivor option. A 9% reduction is chump change in the grand scheme of things.

 

[RunningBum]

Side 1 of me says gambling when you won't miss that $9,000/yr seems foolish.

Side 2 says it's not really gambling since you could probably easily live on that $2.5M without the pension.

I have no idea if that's a fair reduction to get the survivor benefit. That would influence my decision. If it's fair but not generous, I'd probably listen to side 1 and avoid the "probably", but that's me.

 

[Gumby]

This thread had a number of interesting views on the question. You may find some nuggets if you read through it.

https://www.early-retirement.org/forums/f28/spousal-pension-not-optional-for-some-106419.html

 

[clobber]

You should investigate "pension max" strategies. The thinking is that your decision to take the reduced pension for the spouse getting 50% is a form of life insurance. You know the costs: $800/mo for a policy that will pay $50k/year. Is that worth it to you? You would have to go get some quotes, but I'm going to bet you can get a 10 or 20 term life policy that pays out $500k for $200/mo. For example, USAA will give quotes here: https://www.usaa.com/inet/life_apps/LhMemberQuoteEnginePublic

 

[MarieIG]

J&S, hands down.

 

[pb4uski]

You could have her take the higher single life benefit and then buy life insurance on her... if she predeceases you then you could use the life insurance proceeds to buy a SPIA that replicates the pension benefit you would have received under the joint life pension benefit. If you predecease her then she can cancel the policy.

If I understand you right, your 50% survivor benefit would be ~$40k a year? Or $35k a year?

Let's say it is $36k a year... a $36k a year benefit for life for a 55 yo male in CA would cost about $955k. But those are the amount that you would need if she passed right after selecting the single life option. Those premiums will decline over time... down to $627k for a 65yo and $445k for a 75yo.

This link suggests that a whole life policy for a 61yo female for $1m would cost about $6k a year. https://www.valuepenguin.com/average-cost-life-insurance

Or you might build a term life insurance ladder. https://obliviousinvestor.com/laddering-life-insurance-policies/

 

[Dalmore]

Really great advice. Thanks everyone. I was bouncing around the idea of a life insurance policy, but hadn't solidified the idea fully in my mind. I will look into that.

 

[Sunset]

OP - If you are going to do the life insurance thing. Be sure to buy it BEFORE committing to the Pension decision.
Reason is Life insurance company could deny it, or be too expensive. So have them locked in first so you know the plan is viable.

 

[DrRoy]

Perhaps if you invested the $9K/yr you would come out ahead.

 

[donheff]

Perhaps if you invested the $9K/yr you would come out ahead.

Not if she dies a couple of years after ER.

 

[pb4uski]

Not if she dies a couple of years after ER.

Or even 10 years after ER.