Pension decision: Monthly benefit vs. lump sum

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
spartanap
Posts: 41
Joined: Sun May 25, 2014 9:16 pm

Pension decision: Monthly benefit vs. lump sum

Post by spartanap »

I've learned a lot since discovering this site and would like some feedback on this financial situation:

After 30+ years of work (each), my wife and I are both taking our government pensions this summer. We have numerous options available from a 100% monthly benefit to a 50% MB plus a lump sum, as well as a 50% to 100% survivor benefit. I'm 54 and she's 53. We are both in good health.

We are currently able to live well on $65,000/yr and our retirement savings amounts to $950,000 + $130,000 in home equity and a $165,000 mortgage.

We have a few weeks before we have to decide how we want to take our pensions, but we our thinking about taking it in the following manner:

Wife $2200/mo + $73,000 20% lump sum
Me $3100/mo + $113,000 20% lump sum and a 50% survivor benefit. (The survivor benefit is being considered with the assumption that I will predecease my wife.)

I am also taking a new job that will pay 40K/yr. I plan on working for another five years.

Considering all of this, I'm now thinking we have enough saved that I should remove the survivor benefit which would add another $3600/yr to my benefit.

I feel at this point that I'm getting somewhat overwhelmed from analyzing all of the numerous payout options and would appreciate any feedback on this. What else should I be considering? I hope this all makes sense.
Valuethinker
Posts: 41133
Joined: Fri May 11, 2007 11:07 am

Re: Pension decision: Monthly benefit vs. lump sum

Post by Valuethinker »

OK for 3,600 a year, which doesn't sound like money you really need to maintain your standard of living, I would keep the survivor benefit. Survivor benefit of at least 50% or preferrably 60-70% (if there is a choice).

If you die the day after you retire, this is going to be a very good thing. It's all about risk reduction.

Conversely if you die at normal age, and your wife lives to be 100, then again a good thing.

You cannot 'beat' these things in an actuarial sense, assuming average life span. The discounted cost and benefits will be the same assuming average life expectancies. However you can exploit the survivor benefit to insure yourself against 'out there' risks. Like dying the day after you retire, or your wife living a very long time (or both).

Exception: if you have reason to believe your wife will have less than normal life expectancy.

BTW unless you need the lump sum for travel and other purposes (which is not a bad thing to have btw-- travel while your health still allows it) then given the size of your investment portfolio it's a lower risk strategy to take the maximum pension. (not clear if it is CPI indexed or not? If it is, then definitely the pension is valuable). Because of the certainty of the pension income, it allows you to take more risk with your investment portfolio (higher equity weighting).


If your pension is not CPI indexed then the key is to delay taking SS as long as possible (if eligible) because that *is* CPI indexed and it is in the later years of retirement that the cumulative effects of inflation bite (so start at a higher level).

As long as the pension income doesn't boost your tax bracket-- that is a complexity.
lululu
Posts: 1378
Joined: Thu Apr 10, 2014 4:23 pm

Re: Pension decision: Monthly benefit vs. lump sum

Post by lululu »

How safe is your pension? Is it likely to disappear?
basspond
Posts: 1352
Joined: Wed Nov 27, 2013 4:01 am

Re: Pension decision: Monthly benefit vs. lump sum

Post by basspond »

I am assuming there are no discounts with your pensions. If there is, the one with the biggest discount take as a lump sum, the other 50% survivorship annuity. The reason is that the discount on a lump sum might not be as much due to longer mortality rate used in calculating the lump sum. With my pension the discount rate is almost cut in half, based on the lump sum amount being deferred. If no discount, then your wife take the annuity and you take the lump sum. (Based on who you estimate lives the longest.)
User avatar
Sbashore
Posts: 950
Joined: Wed Feb 20, 2008 10:38 pm
Location: Goodyear, AZ

Re: Pension decision: Monthly benefit vs. lump sum

Post by Sbashore »

How much is your lump sum costing you? I would also opt for a survivor benefit. I'm the recipient of one from my late wife and believe me it worked out well from an actuarial standpoint. Sometimes life comes at you pretty fast.
Steve | Semper Fi
Dandy
Posts: 6353
Joined: Sun Apr 25, 2010 7:42 pm

Re: Pension decision: Monthly benefit vs. lump sum

Post by Dandy »

I'm always in favor of maximizing pensions and SS unless there are special circumstances like health of participants or the company. don't fall in love with lump sums if it means lowering your pension - unless you are in real need for it. Lump sums are often like shinny objects they distract.
You have a decent retirement portfolio and a new job - You should be well set for a nice retirement.
Topic Author
spartanap
Posts: 41
Joined: Sun May 25, 2014 9:16 pm

Re: Pension decision: Monthly benefit vs. lump sum

Post by spartanap »

Our pensions do not provide inflation adjustments and I feel confident in the long-term health (for us, maybe not for younger participants) of our state's pension system.

Apologies for my ignorance -

basspond - help me understand what you mean by "discounts"

sbashore - help me understand how to determine how much my lump sum is costing me.

Thanks everyone for the replies; very helpful.
User avatar
Sbashore
Posts: 950
Joined: Wed Feb 20, 2008 10:38 pm
Location: Goodyear, AZ

Re: Pension decision: Monthly benefit vs. lump sum

Post by Sbashore »

What is the difference in your pension with and without the lump sum. The difference is the cost of the lump sum.
Steve | Semper Fi
Topic Author
spartanap
Posts: 41
Joined: Sun May 25, 2014 9:16 pm

Re: Pension decision: Monthly benefit vs. lump sum

Post by spartanap »

Foregoing the $73,000 20% lump sum would add approx. $6600/yr to my wife's pension.

Removing my $113,000 20% lump sum would add approx. $9600/yr to my pension while retaining the 50% survivor benefit.
User avatar
Sbashore
Posts: 950
Joined: Wed Feb 20, 2008 10:38 pm
Location: Goodyear, AZ

Re: Pension decision: Monthly benefit vs. lump sum

Post by Sbashore »

spartanap wrote:Foregoing the $73,000 20% lump sum would add approx. $6600/yr to my wife's pension.

Removing my $113,000 20% lump sum would add approx. $9600/yr to my pension while retaining the 50% survivor benefit.
A quick calculation tells me you're ahead after 11-12 years taking the increased pension over the lump sum. How long do you estimate your retirement period? In most circumstances you'd be way ahead with the increased income over the lump sum.
Steve | Semper Fi
User avatar
Frugal Al
Posts: 1723
Joined: Fri May 28, 2010 10:09 am

Re: Pension decision: Monthly benefit vs. lump sum

Post by Frugal Al »

+1 Sbashore, the lump sums are a poor deal; moreover, the OP would seem to have little need for it. Over 35 years they'd need about an 8% return to make the lump sum worthwhile--better off with the full pension.
Post Reply