Which pension option to choose

[donheff]

My initial inclination would be to take the largest survivor benefit to protect the younger spouse in case of an early death. The non COLA'd nature of the annuity and the existence of $500K term for ten years adds complexity. Others have suggested taking the max and investing the difference (~12K/yr). Could the term be decreased and extended after ten years and, if so, what are the costs? At what point would the investments likely build up to the point that the couple could start spending the difference?

I suspect I would still come back to the greater protection of a guaranteed $1800/month but running the scenarios would make me more comfortable.

 

[mikeL]

You can submit basic data to various sites and get an estimate of your shelf life. That is what we do to get another important factor for the equation.

I'd place importance on the age of spouse and children too. The total dollars that might be collected is outweighed IMO by the projected standard of living.

Just tried two online sites. They say 76+77 years old.

 

[mikeL]

I took 100% survivor for DH and I, that way we knew a set budgeted amount we could count on for our lifetimes.
I ran FireCalc for all of our possibilities and felt most comfortable with that choice.
Have you run Firecalc?
SS for you and your kids adds a pretty stable leg to your 3 legged table (pension, SS, investments).

I ran it and it said zero failed cycles.

 

[mikeL]

SS strategy should be in the calculations, which makes is quite a bit more complex. Delaying SS is generally the cheapest, cola'ed annuity purchase you can make. How long will your kids draw before 18 ?

Just as a different scenario - what about taking the single life annuity and using the "extra" money to delay your SS ? That also benefits your wife, how much depends on her own SS record. Complex problem for sure, but it is solvable. The important consideration is to not treat the pension without consideration of SS (or vice versa). They have to be considered together to find the optimal solution.

The childrens social security will be for 8 years. It basically ends the same time as my life insurance ($500,000 for $1240/year) at age 70.5. I can't extend the policy.

 

[sengsational]

I think the reason these decisions are hard is because they do the math beforehand and make all of the choices pretty close. So the approach would be to know what they knew when they made the offer, then see if you have any facts they didn't consider. So if they had the wife's age, your age, etc, those would have no push, one way or the other. But they probably didn't know about kids. They didn't know your family longevity prospects. They didn't know how health conscious you both are, etc. Those push on the directionality of the decision. Then there's the elephant in the room: your assumption about interest rates over the long term; if you think you will get paid-off with worthless (worth less) dollars, pull it in now.

 

[RunningBum]

I think the reason these decisions are hard is because they do the math beforehand and make all of the choices pretty close. So the approach would be to know what they knew when they made the offer, then see if you have any facts they didn't consider. ...

Then there's the elephant in the room: your assumption about interest rates over the long term; if you think you will get paid-off with worthless (worth less) dollars, pull it in now.

You had good points, but I question that final one, because you don't consider it with respect to the bolded part above, like you did the other factors.

Short of deflation, there's no doubt you will get paid off with dollars that are worth less. They know it and you know it. The question is whether you know more about future interest rates than they do. That seems doubtful to me.

 

[jollystomper]

I dwelt less on the math of "which option will get me the most money" and more on the math of "which option will be best for my spouse, without them having to deal with investments, etc.". For that reason we chose 75% survivor. DW wanted that amount instead of 100% as she wanted us to have more money now while I am alive. My pension is large enough and expenses low enough that 75% survivor + my SS survivor benefits will cover her regular expenses should I die first.

 

[Big_Hitter]

there is a significant haircut for the 100J&S form of payment for a reason - the payments are expected to have extremely long tails

like others have said, the decision will depend on your risk tolerance and general insurance philosophy; those forms of payment look actuarially equivalent using some interest rate and mortality assumption. Where those disclosed?

when my dad retired in 92, i advised him to take the 100J&S but the haircut was much less significant, as there was only 1 year age difference. My mom is still receiving the pension. YMMV bigly

 

[mountainsoft]

Single life annuity $2,868
100% survivor 1800 a month beneficiary gets 1800
I'm turning 60 and my non- working wife 43.

That's quite a difference. The estimates on my wife's pension only vary by a couple hundred dollars between single and 100%. So we will be opting for the 100% survivor option.

With 1000 dollar a month difference, I would research how much a life insurance policy would cost. If she dies first, you continue your pension. If you die first, she would receive the life insurance payment. Just make sure the coverage would provide equivalent income if you die (For example: 1800 x 12 months x approx 45 years for her would be around a 1 million dollar insurance policy, if my quick math is correct). If your policy premiums are less than the 1000 dollar a month pension difference, it should work out.

That said, opting for the 100% survivor is probably the simplest option and one less thing for your wife and kids to worry about if you die.

 

[Sunset]

That's quite a difference. The estimates on my wife's pension only vary by a couple hundred dollars between single and 100%. So we will be opting for the 100% survivor option.

With 1000 dollar a month difference, I would research how much a life insurance policy would cost. If she dies first, you continue your pension. If you die first, she would receive the life insurance payment. Just make sure the coverage would provide equivalent income if you die (For example: 1800 x 12 months x approx 45 years for her would be around a 1 million dollar insurance policy, if my quick math is correct). If your policy premiums are less than the 1000 dollar a month pension difference, it should work out.

That said, opting for the 100% survivor is probably the simplest option and one less thing for your wife and kids to worry about if you die.

Especially if OP dies at age 71 or older, when insurance has ended and she is 54.

 

[mikeL]

there is a significant haircut for the 100J&S form of payment for a reason - the payments are expected to have extremely long tails

like others have said, the decision will depend on your risk tolerance and general insurance philosophy; those forms of payment look actuarially equivalent using some interest rate and mortality assumption. Where those disclosed?

when my dad retired in 92, i advised him to take the 100J&S but the haircut was much less significant, as there was only 1 year age difference. My mom is still receiving the pension. YMMV bigly

I've attached the relative valuation

 

[target2019]

Just tried two online sites. They say 76+77 years old.

I put your annual numbers into Flexible Retirement Planner (FRP). Had to guess at a few things.

20/80 AA - Risk Averse (6.0%/4.3%)
3.0% Inflation
$50K Spending (Flexible)
$400K Taxable
$1,200K Deferred
$400K Tax free
$21,600 SS
$9,600 SS for 10 years

$21,600 Pension (until 90 for spouse)
or
$35,520 Pension alternative (18 years)

$100,000 RE Down payment in 4 years
$36,000 annual RE PMI starting in 4 years for 20 years

You leave the building at 78, spouse at 90.​

FRP says you'll be fine with either pension choice, 100% Success with a flexible spending policy. Of course the results are not predictive, and I'm a rank amateur and not pro.

Inflation is the killer. If we have 4% average in the future instead of 3%, that hits all plans like a ton of bricks.

How about medical and higher education for children?

 

[pb4uski]

Another option to consider if you can pass underwriting is to take the single life option and create a term life insurance ladder with a death benefit sufficient to provide your DW with a SPIA with replacement income if you pass. You could use your current term life insurance policy as one of the legs of the ladder.

You use a ladder because the older your DW gets the cheaper the SPIA costs because it expected payout term is shorter.

The other benefit of the ladder is you can extend protection beyond when you current term life policy ends.

As long as the cost of the protection is less than $1,000/month then you are ahead.

https://obliviousinvestor.com/laddering-life-insurance-policies/

 

[ckelly78z]

With a 43 year old wife, and 2 young children, I believe the 100% option is the only way to go to ensure their comfortable future. I can't imagine her heartache if something unfortunate would happen to you in your first years of retirement, let alone the financial monthly strain without any pension check coming in.

 

[RetireAge50]

I have a $500,000 life insurance term policy until age 70.5



$2,000,000 securities and cash



Expenses $2000-$4000/mo

Based on this information would go with single life higher payment. No need to buy more life insurance with these assets. Use the $12k/yr to go to Disneyland with kids (while you are alive).

 

[Big_Hitter]

I've attached the relative valuation

so gar94 and 5% were used to convert the sla into a js100? what assumptions were used to calculate the relative values? 417e (lump sum assumptions?)

 

[pb4uski]

so gar94 and 5% were used to convert the sla into a js100? what assumptions were used to calculate the relative values? 417e (lump sum assumptions?)

BH, very few of us here.. actually probably none... are pension actuaries... so you might want to re-phrase the question in English.

 

[OldShooter]

Actually, in following this thread my thought is that this is not a question for pension actuaries. It's the old problem: If you're going to cut with an axe, you don't need to measure with a micrometer.

This is really about how much risk the OP wants to bear vs the cost of laying off that risk. Health, lifespan, etc. for an individual couple are not a subject for numerically reliable prediction. The couple is not going to live a few thousand lifetimes, at which point actuarial analysis might be relevant.

It's really the old Clint Eastwood/Dirty Harry line "...you've got to ask yourself one question: 'Do I feel lucky?' "

 

[Big_Hitter]

BH, very few of us here.. actually probably none... are pension actuaries... so you might want to re-phrase the question in English.

EDIT - I had this bass ackwards

it appears the plan administrator is using two sets of assumptions

2) 5% interest and GAR94 (sex-distinct) mortality to calculate the relative value
1) something else to convert the the single life annuity into the 100% J&S form of payment (i.e. the haircut)

if 1) and 2) were the same, the relative values would be 100%

that's my question, because the disclosure is showing the 100% J&S form of payment to be the "least valuable" option

 

[finnski1]

I've attached the relative valuation

After seeing your chart I would do the following.


Take the 10 yr certain and continuous option of $2732/month
purchase a 2nd life ins policy of $500k 20 yr level term which is running about $317/month for 500k for a 60 year old male in above ave health from A- rated insurers (John Hancock etc

This protects your wife from a problem if you die after 70.5 where she would receive nothing if you took the single life pension.
So even if you die in a month(certainly hope not) she still gets the $2732/month for the next 10 years.

At 43 according to immediate annuities.com a female for $500k could purchase a $1602/month SPIA. only $198/month less than the joint and survivor ($1800/month ) option plus she gets the $2732/month or $932 more per month than the JS
At 48 $500k gets a $1687/month SPIA. $133/month less than JS but again $932/month more per month from the 10 yr certain(for 5 years since you would be 65)
At 53 $500k gets a $1799/month SPIA therefore equal to the original JS so no loss to her by waiting.


So $932/month extra - ( $317 for additional life ins premiums)=$615 extra for 10 years or $73800 total net extra dollars.
So if you die before 70.5 she just purchases the SPIA with the insurance proceeds to replace the amount she would have received if you chose the original JS pension and you enjoy the extra money per month in the mean time. In fact I would argue even if you did pass anytime before 70 she could still wait till she was 53 to purchase the SPIA and then receive the same JS as original since she would be getting the $2732 anyway.
But wait there's more:


If you die during before 70 the spouse would get (2) $500K payments and then she could get $1million SPIA's (or the above mentioned ones plus an extra $500k in her pocket)of:
age 43: $3204/month
age 48: $3375/month
age 53: $3597/month.(interestingly still get $3514/month with a life and 20 year certain period so the kids could have 20 years of payments should the wife pass.)

Of course these require you too die young,not a great strategy

After age 53 it then reverts back to
$500k SPIA
age 54: $1829/month
age 58: $1954/month
age63: $2183/month


SS: again you have interesting conditions to consider.
you appear to have:
$1800/month at 62
$2571/month at 67
$3188/month at 70
also $800/month extra from age 62 to 69(oldest kid turns 18)=$67200
and $400.month extra from age 69 to 72(youngest kid turns 18)=$14400
(1800+800)*12*7 years=$218400(1800+400)*12*3 years=$79200
total ss received from age 62 to 72=$297600
if you waited to 70 total ss from 70 to 72 would be $3188/month *24=$76512.


Yes I'm bored and it's raining here
ANYWAY this all might ne a moot point based on your assetts and spending.
It looks to me like you took a WAG at expenses.$2000/month seems way low with a wife and 2 kids and even $4000/month would be very frugal.
Regardless at $4000/ month and 2 million you are only at a 2.4%(or 3% setting aside $400k for the house) WR before any pension and SS so I don't think it is an issue which ever you choose.




so now $297600+1800x=$76512+3188x
x=159 months (13 years and 3 months)
so a "breakeven" #by waiting to claim at 70 would be (72+13.25) about 85 and 3 months. Typically the break even form 62 to 70 is around 80.5 but you have the extra kid money. quite a while but your wife would still only be 68.
Keep in mind that she can only get 100% of your benefit if she waits to her FRA which is 67.
Also it is 100% of what you get when you claim, not your FRA so if you claim at 62 she can never get more than $1800/month but if you claim at 70 she would get the $3188 /month and still be fairly young at 68.

 

[Big_Hitter]

Actually, in following this thread my thought is that this is not a question for pension actuaries. It's the old problem: If you're going to cut with an axe, you don't need to measure with a micrometer.

This is really about how much risk the OP wants to bear vs the cost of laying off that risk. Health, lifespan, etc. for an individual couple are not a subject for numerically reliable prediction. The couple is not going to live a few thousand lifetimes, at which point actuarial analysis might be relevant.

It's really the old Clint Eastwood/Dirty Harry line "...you've got to ask yourself one question: 'Do I feel lucky?' "

yes this is an individual risk decision; I'm just curious about the relative value assumptions

 

[gerntz]

If you're in good health & take care of yourself, taking more early when a dollar is worth more & investing the $1068/mo. difference seems like the better deal to me.

 

[finnski1]

it appears the plan administrator is using two sets of assumptions

1) 5% interest and GAR94 (sex-distinct) mortality to convert the single life annuity into the 100% J&S form of payment (i.e. the haircut)
2) something else to calculate relative value

if 1) and 2) were the same, the relative values would be 100%

that's my question, because 2) is showing the 100% J&S form of payment to be the "most valuable" option

I'll admit I am ignorant on the points you are making but where does it show that the 100% J&S to be "the most valuable"
I see that is says:
SLA is 121% more valuable than the 100% J&S
C&C is 119% "more valuable than 100% J&S
50% J&S is 114% "more valuable than 100% J&S
etc. etc.


I am looking at the very bottom row of his table.
Am I reading this wrong?

 

[Big_Hitter]

I'll admit I am ignorant on the points you are making but where does it show that the 100% J&S to be "the most valuable"
I see that is says:
SLA is 121% more valuable than the 100% J&S
C&C is 119% "more valuable than 100% J&S
50% J&S is 114% "more valuable than 100% J&S
etc. etc.


I am looking at the very bottom row of his table.
Am I reading this wrong?

well, I am retired LOL - yes I read it backwards. So I may have my 1) and 2) inverted. It may be using 5% and GAR to determine the relative values. In any event, the election packet would spell that out. I fixed my previous post, I think...

 

[OldShooter]

If you're in good health & take care of yourself, taking more early when a dollar is worth more & investing the $1068/mo. difference seems like the better deal to me.

Probably not true if you only live a month.