Help Choosing Survivor Pension Option (50% vs 100%)

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wilked
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Help Choosing Survivor Pension Option (50% vs 100%)

Post by wilked »

This advice is for my father in law, who is relying on me for some financial help.

Union worker, he will retire in about a year at 62. His wife is a year older, each has a mother still alive in their early 90s. They will need the pension to live on so the decision will have impact on their finances.

50% - $2105
100% - $1915

He is in good shape but does have a heart condition, she has no known health issue.

I really am not sure how to calculate what is optimal (would love advice there). It is not COLA adjusted should it matter.
Stonebr
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by Stonebr »

Depends on what else they have. Does she have her own pension? Do they have $2 million stashed away somewhere? Will they both get a nice Social Security benefit?

These two amounts are financially equivalent. That is, they take into account all of the life expectancy and interest earnings based on current market rates, their ages and genders. Females tend to outlive males by several years, so she's the one that will have to take the pay cut if they go with the 50%. Will she be able to live on it?

FWIW, when my wife and I faced this choice, I let her decide since my pension benefit is much greater than hers. She said "NO WAY!" to the 50%. She is a retired pension professional.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear
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cheese_breath
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by cheese_breath »

So if he dies first how much will his wife have to live on?

50% option gives her 2105/2 = $1052.50
100% option gives her $1915.

Is it worth it to get $190 more while he's living if she has to live on $862.50 less if he dies? You tell me.
Last edited by cheese_breath on Mon Apr 27, 2015 8:31 pm, edited 1 time in total.
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wilked
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by wilked »

They have other money stashed elsewhere, each will get a bit more than this in SS benefits, but the pension will be an important part of their retirement (let's say it will be at least 25% of their retirement income for the foreseeable future).
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wilked
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by wilked »

cheese_breath wrote:So if he dies first how much will his wife have to live on?

50% option gives her 2105/2 = $1052.50
100% option gives her $1915.

Is it worth it to get $190 more while he's living if she has to live on $862.50 less if he dies? You tell me.
It makes the choice a little plainer when spelled out that way

Perhaps this is not a choice the board is well-equipped to answer. I am trying to convince them to wait until FRA to take SS since it is inflation adjusted and will be a really nice boost should they be able to wait. I might have a hard time convincing them to do the lower pension amount (granted, higher if he dies) and delay SS (would probably mean depleting a decent percentage of their retirement savings)
basspond
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by basspond »

We are looking at a similar scenario and we would choose the 100% option.
spectec
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by spectec »

Is he insurable? When my wife retired with a state pension, we faced a similar decision. She had the defined benefit plan, while I have a defined contribution plan. After looking at the options, we decided a term life insurance policy on her life would more than cover the gap if she died first, and the premium on the policy was much less than the difference in benefit. Once we verified that she was insurable, we bought the policy and pulled the trigger on the greater retirement benefit.

We probably took a bit of a risk initially, but now that we're 5 years into the plan I'm satisfied that it was the best move. If she dies first I have the insurance payoff the backstop my retirement. If I die first, she cancels the insurance policy and gets an increase in her income in the amount of the premium. Maybe your folks should run the numbers on a plan to backstop their benefit with a term policy if his health is OK.
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TIAX
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by TIAX »

Is there a single life option? If so, what's the amount?
Ron Ronnerson
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by Ron Ronnerson »

For my pension, I have similar options and am planning to choose 100%. My wife and I are the same age. My pension will be reduced by about 10% as a result, a relatively small amount (imho) to ensure she continues to receive my entire benefit in case she outlives me.
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wilked
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by wilked »

spectec wrote:Is he insurable? When my wife retired with a state pension, we faced a similar decision. She had the defined benefit plan, while I have a defined contribution plan. After looking at the options, we decided a term life insurance policy on her life would more than cover the gap if she died first, and the premium on the policy was much less than the difference in benefit. Once we verified that she was insurable, we bought the policy and pulled the trigger on the greater retirement benefit.

We probably took a bit of a risk initially, but now that we're 5 years into the plan I'm satisfied that it was the best move. If she dies first I have the insurance payoff the backstop my retirement. If I die first, she cancels the insurance policy and gets an increase in her income in the amount of the premium. Maybe your folks should run the numbers on a plan to backstop their benefit with a term policy if his health is OK.
Good thought, I will check into this

He says they have a 20 year term life ($200K each) but is not certain on the details...is checking into it
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by rotorhead »

wilked, there was a message thread on this subject a couple of years ago. Here is link:

viewtopic.php?f=2&t=121661

You can see my comments at the time about 2/3 way down. I will soon be retired 12 years, and still think I made the right decision to take 100% pension, and buy the term life policy.

It's an intensely personal decision; and there is no easy answer. Your FIL has time yet, so no hurry on the decision. If you do a web search, you'll find lots of "advice" on the subject. I would recommend consulting a financial advisor.

Best wishes,
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wilked
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by wilked »

Hmm, I convinced him I could play the part of the financial advisor and save him the $$. :shock:

I may have him spend a little money to hire one eventually, but if nothing else I can get all the finances arranged well and organized so we only pay for a small number of hours, perhaps an online advisor.
spectec
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by spectec »

One caution. The life insurance industry has a name for this - "pension maximization.' Agents are trained to pitch this, but they try to sell permanent insurance as the solution. It NEVER works using permanent insurance, because life insurance is not an investment. You must evaluate this using term insurance as the backstop vehicle, which means most insurance agents and financial advisors will quickly lose interest in running the numbers for you, or they will try to confuse the analysis to skew things in favor of permanent insurance. They have lots of tricks up their sleeve.
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2comma
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by 2comma »

I had to make the same decision a couple of years ago. There were two things that weighed most heavily on my mind - 1) how did I feel about increasing the chances of leaving her with less to live on if I died early and she was long lived, 2) when I die she becomes single for tax filing purposes (higher taxes). So I went with the 100%.

I never got much help (here) with "calculating" the best approach but I'd assume the pension amounts are actuarially fair (as I remember there are some rules about how it is calculated). Unfortunately, what is statistically correct for the total population may not be right for an individual couple - so you should consider the worst case.

You seem to indicate you might convince your dad to either take the 100% J&S or delay SS but not both. I'd say do both if they possibly can but if only one can happen I'd guess (this is just a guess) I'd try to convince him to delay SS as long as possible. First, he will get more if he delays (roughly 8%/yr) and she as the survivor, second SS is COLA'd and that COLA applies to the larger amount and it won't be affected by inflation over time and third, the pension will be worth much less in 20-30 years due to inflation.

I'd also think about what RMD's he'll be paying starting in the year he turns 70 1/2. If most of their money is in tax-deferred accounts (401K/IRA) if he delays SS and has less income from the pension that might allow him a little more room to do some Roth conversions at a lower tax rate between the time he retires and when SS kicks in.

I hope some of this helps and good luck!
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BL
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by BL »

There are various SS options available. She (if lower PIA) could start at 62; He could do spousal at FRA (66?) and his own at age 70 which she would inherit if he died first. This would require spending some retirement savings in order to buy this COLA-enhanced annuity, the best annuity deal possible.

I would strongly suggest considering the 100% replacement as the best choice, and lower it only after seriously studying the results of the survivor having 1/2 the income. I doubt that any insurance would be a reasonable substitute, but don't have knowledge about that. I do know that insurers liked to sell insurance to military folks as a substitute for SBP, and the numbers rarely worked.
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by bobcat2 »

wilked wrote:This advice is for my father in law, who is relying on me for some financial help.

Union worker, he will retire in about a year at 62. His wife is a year older, each has a mother still alive in their early 90s. They will need the pension to live on so the decision will have impact on their finances.

50% - $2105
100% - $1915

He is in good shape but does have a heart condition, she has no known health issue.

I really am not sure how to calculate what is optimal (would love advice there). It is not COLA adjusted should it matter.
Why don't you go to Vanguard's Income Solutions portal and price the two pension payout options as life annuities, or go to some other life annuity site and price the two options. If one of these options has a much higher price (present value) than the other, then you should pick that option. It's worth more. :D If both options have similar prices, then decide on the basis on his health relative to hers.

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OutInThirteen
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by OutInThirteen »

I calculated the "price" for the 100% survivor continuance to be a 9% hit. That was the same for my pension. Not much of a hit to ensure my spouse's well-being should I pass first. A few details though. My pension is COLA'd, and represents at least 50% of our expected retirement income, including SS and two other pensions. My spouse would have all basic expenses covered at 100% of my pension plus SS survivor benefits, even if I took SS at age 62. Not a hard decision for us.

On the other hand, my stepfather, who had a COLA'd pension from the same employer, elected the 50% survivor continuance. Near the end of my mother's life, the extra $1,950 a month would have made a huge difference in her standard of living, especially because she had depleted almost all of her other resources by then. 100% continuance would have made much more sense looking in hindsight.
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by #Cruncher »

cheese_breath in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2473179#p2473179]this post[/url] wrote:50% option gives her 2105/2 = $1052.50
100% option gives her $1915. Is it worth it to get $190 more while he's living if she has to live on $862.50 less if he dies?
The answer depends on three things, all of which we can only estimate:
  • How long the pensioner (call him Mark) will live.
  • How long his wife (call her Ferne) will outlive him.
  • The discount rate to compute future and present values.
But we can get a feel for the relationship among these three things. For instance, we can compute how long Ferne must outlive Mark for the 100% option to provide the same value as the 50% option. As shown in the following table this will be more the longer Mark lives and more the higher the discount rate.

Code: Select all

  Mark     -- Discount Rate --
Lives to    3%      4%      5%
--------   ---     ---     ---
   79      5.3     6.0     6.9 
   84      7.6     9.2    11.3 
   89     10.6    13.7    18.9
For example, if Mark dies at age 79 and we use a 3% discount rate, Ferne need live only 5.3 years longer before the 100% option becomes the better one. But if Mark lives to age 89 and we use a 5% discount rate, Ferne must live another 18.9 years before the 100% option is better.

For those interested, here is the spreadsheet I used to compute the above results with an assumed 4% discount rate and age 84 life expectancy. (The SSA Life Expectancy Calculator gives age 83.8 for a 62 year old male.) It uses the Excel FV and NPER functions.

Code: Select all

  Row   Col A      Col B       Col C
  ---  -------    -------    ---------
   1        4%                           Annual discount rate
   2      62.0                           Mark's age
   3      84.0                           Mark lives to age
   4       264                           Months get Mark payment
   5   0.3274%                           Monthly discount rate
   6   50% Opt    100% Opt   Difference
       --------   --------   ----------
   7   2,105.00   1,915.00     190.00    Monthly payment while Mark lives
   8   1,052.50   1,915.00    (862.50)   Monthly payment while only Ferne lives
   9    880,852    801,345     79,507    Future value of Mark payments
  10                   9.2               Years Ferne must outlive Mark to break even

Code: Select all

=ROUND(12 * (A3 - A2), 0)        Formula in cell A4
=(1 + A1) ^ (1 / 12) - 1         Formula in cell A5
=FV( $A5, $A4, -A7, 0, 0)        Formula in cell A9
=NPER(A5,  C8,  C9, 0, 0) / 12   Formula in cell B10
donall
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by donall »

At 62, term life insurance can be pricey, especially if there is a health condition, and there is no cola.
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by carolinaman »

I had to make this decision when I retired. I chose 50% survivor for my wife because 1) she is 2 years older than me and some serious health issues which makes it more likely that I will outlive her, 2) she will get my full SS benefit if she survives me, 3) combination of 50% pension and SS will enable her to maintain a comfortable standard of living, and 4) retirement savings are also available if she needs them.

This does not mean this is the right choice for your FIL. Everyone's situation is different and it is an individual choice and preference. The key point for me is will his wife be able to maintain a decent standard of living at the 50% pension level, considering all retirement income and assets.
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by cheese_breath »

johnep wrote:... The key point for me is will his wife be able to maintain a decent standard of living at the 50% pension level, considering all retirement income and assets.
I think you hit the nail on the head. Will taking the 50% option have major, little, or no impact on the widow's standard of living.
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by vested1 »

wilked wrote:
cheese_breath wrote:So if he dies first how much will his wife have to live on?

50% option gives her 2105/2 = $1052.50
100% option gives her $1915.

Is it worth it to get $190 more while he's living if she has to live on $862.50 less if he dies? You tell me.
It makes the choice a little plainer when spelled out that way

Perhaps this is not a choice the board is well-equipped to answer. I am trying to convince them to wait until FRA to take SS since it is inflation adjusted and will be a really nice boost should they be able to wait. I might have a hard time convincing them to do the lower pension amount (granted, higher if he dies) and delay SS (would probably mean depleting a decent percentage of their retirement savings)
Make sure when you do add up the numbers that you take all of it into consideration. If your FIL dies first, not only would his wife receive $862.50 less a month for a 50% option on the pension but she would also lose the lower of the two SS benefits, which combined is quite a hit for household income.

This is the main reason we are choosing the 100% survivor benefit on my wife's pension. Translation: more beer money. :beer
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by Valuethinker »

wilked wrote:This advice is for my father in law, who is relying on me for some financial help.

Union worker, he will retire in about a year at 62. His wife is a year older, each has a mother still alive in their early 90s. They will need the pension to live on so the decision will have impact on their finances.

50% - $2105
100% - $1915

He is in good shape but does have a heart condition, she has no known health issue.

I really am not sure how to calculate what is optimal (would love advice there). It is not COLA adjusted should it matter.
This is probably fairly straightforward.

If they don't *need* that $200 a month, ie they can spend down an additional $2400 a year of their investments to maintain their lifestyle, then they should go for the survivor pension.

It will make such a huge difference to her if he does die early.

My father had a heart condition and 2 bypasses. That wasn't what killed him in the end. We are very glad to have his c. 60% pension for mum.
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by freddie2011 »

I had always planned for my husband's retirement using a 100% benefit calculation. As he neared retirement 3 years ago, he became nervous about the huge decrease in his reduced pension (his company froze their plan a few years before retirement causing him to lose half of his expected pension) that this 100% benefit would cause. We spent a lot of time talking and calculating taking into account the following: I'm 3 years older than he is; both of our fathers died in their 70's but his mother lived to 95 and mine (with a serious illness) to 89; he's the spender and I'm the saver; we have a very comfortable nest egg. With a reduced pension benefit, if I die first my husband will lose only my SS, but if he dies first I will lose both my own SS and a portion of his pension. But, if he dies first, I would no longer have to pay his medicare, supplemental insurance, LTC insurance, and other monthly expenses that he incurs. After all of this, it looked like my real loss in the event of his death, taking a 75% survival benefit, would be only about $200/month so that is what we decided to do. We're three years into retirement and are both still very healthy and active. I want to emphasize that your in-laws really need to talk this through and be very honest about their financial calculations. If his spouse would be on the edge without a 100% survival benefit, think about that decision very carefully. Good luck.
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by teacher »

I choose 100% for DH purely on emotional basis. My thinking was, if I pass before him, the last thing I want is for him to have to deal with reduced guaranteed income, even though the portfolio would easily make up the difference.
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wilked
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Re: Help Choosing Survivor Pension Option (50% vs 100%)

Post by wilked »

Thanks everyone! Great advice and helped clarify it for me. Will definitely recommend the 100% option
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