Pension Annuity Distribution Options advice please

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Topic Author
tdmtdv6
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Pension Annuity Distribution Options advice please

Post by tdmtdv6 »

I have a non-COLA pension from a previous employer. I will be eligible to withdraw in 2022 (at age 55).
Below are different options for distribution. I am seeking advice on which age and options (75%, 100% J&S, etc.) are best.

Both my wife and I are 52 and fairly healthy. We probably won't need this money at 55 yet.
My parents passed away in their early 80's. My wife's parents are in their late 70's/early 80's and in decent health.


Payable as of 6/2022 to: Payable as of 6/2027 to: Payable as of 6/1/2032 to:
You Your You Your You Your
Beneficiary Beneficiary Beneficiary
Single Life Annuity $1,026 $1,327 $1,499
5 Years Certain and Life $1,016 $1,016 $1,306 $1,306 $1,459 $1,459
25% Joint & Survivor Annuity $985 $246 $1,263 $316 $1,412 $353
50% Joint & Survivor Annuity $948 $474 $1,205 $602 $1,334 $667
75% Joint & Survivor Annuity $914 $685 $1,152 $864 $1,264 $948
100% Joint & Survivor Annuity $881 $881 $1,103 $1,103 $1,202 $1,202
50% J & S Pop Up Annuity $939 $469 $1,187 $593 $1,304 $652
100% J & S Pop Up Annuity $866 $866 $1,073 $1,073 $1,155 $1,155

Thanks
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David Jay
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Re: Pension Annuity Distribution Options advice please

Post by David Jay »

So much depends on your other assets and income streams. Do you have the portfolio (401K, IRA, etc) for living expenses without the pension? How much do you need for living expenses after SS benefits kick in? All these thing come into play.

Two examples:
1. If your spouse would need the money after you pass (single social security benefit, portfolio not adequate) then a 100% J&S is the way to go with maximum claiming delay that you can afford to provide the largest benefit.

2. By contrast, if you have squirreled away a lot and you don’t need the pension to live on after one spouse passes, then it doesn’t matter much how you take it.
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Stinky
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Re: Pension Annuity Distribution Options advice please

Post by Stinky »

David Jay wrote: Mon Apr 27, 2020 6:05 pm So much depends on your other assets and income streams. Do you have the portfolio (401K, IRA, etc) for living expenses without the pension? How much do you need for living expenses after SS benefits kick in? All these thing come into play.

Two examples:
1. If your spouse would need the money after you pass (single social security benefit, portfolio not adequate) then a 100% J&S is the way to go with maximum claiming delay that you can afford to provide the largest benefit.

2. By contrast, if you have squirreled away a lot and you don’t need the pension to live on after one spouse passes, then it doesn’t matter much how you take it.
Agreed with this. There’s no single correct answer. It all depends on you and your financial situation.

The amounts quoted are all “actuarially equivalent”, so the pension plan is indifferent as to which you take.

If you don’t need the money now, I’d likely defer taking the payment until a later time, as your future financial situation might change in ways you can’t anticipate now.
It's a GREAT day to be alive - Travis Tritt
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tdmtdv6
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Re: Pension Annuity Distribution Options advice please

Post by tdmtdv6 »

Thank you David and Stinky for the responses.
I will wait a few more years to see how the markets and our financial situation pan out and decide at that time.
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Watty
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Re: Pension Annuity Distribution Options advice please

Post by Watty »

tdmtdv6 wrote: Mon Apr 27, 2020 4:21 pm My parents passed away in their early 80's. My wife's parents are in their late 70's/early 80's and in decent health.
One thing to watch out for is that unless there is a specific issue related to your genetics your family history may not make as much difference in your life expectancy as you might assume. Some big reasons for this are;

1) If your relatives died from something like cancer or heart disease then that may be caught much earlier in you when it is more treatable.

2) There are a lot of advances in medicine so that many things are more survivable now then they were a generation ago, much less in your grandparents time.

3) Your lifestyle is may be a lot different especially when it comes to things like diet and smoking. If your ancestors had physical jobs like being farmers that kept them in good shape and you work at a desk all day that also makes a big difference.

Anyway I would not place a lot of weight on your family history without a lot more research. It is not like they were living or dying at extremely young or old ages.

One thing that you can do is that before you have to make the decision about what option to take you can have a very good physical and talk with your doctor about how your overall health is compared to average. You should also ask them if there are any tests that they would recommend even if the insurance company will not pay for it.

A few things to consider;

1) Make the decision on what to do with the pension in conjunction with deciding when to start with Social Security. For diversification you might want to start the pension when you retire then delay starting Social Security until you are 70. You can use this web site to get a suggested Social Security claiming strategy.

https://opensocialsecurity.com/

2) Do your calculations in after tax numbers. If you start the pension while you are still working at some other job then a lot of it will likely just be taxed.

3) Understand what happens to the pension if either or both of you die before you start it. In some situations your estate might not get anything, there is nothing nefarious about that, that is just the way pensions work but so would be good to understand that.

4) If you will be getting your healthcare with an affordable care act subsidy before you start Medicare then you will need to manage your income so that you do not exceed the subsidy cliff an lose it all. The pension would count towards that.

It is not a mathematical decision but if I was in your situation I would likely just take the "100% Joint & Survivor Annuity" as soon as I retired from my current job because it would not be taxed as much then. You likely do not need to start it when you are exactly 55,60, or 65.
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tdmtdv6
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Re: Pension Annuity Distribution Options advice please

Post by tdmtdv6 »

Watty wrote: Tue Apr 28, 2020 11:47 am ....It is not a mathematical decision but if I was in your situation I would likely just take the "100% Joint & Survivor Annuity" as soon as I retired from my current job because it would not be taxed as much then. You likely do not need to start it when you are exactly 55,60, or 65.
Thank you, Watty for taking the time to respond. All great points to consider before making a decision. I really appreciate it.
I was planning to work another few more years until my youngest son finishes 4-year college. However, I was recently laid-off and I now seriously consider retire early as I think we have saved enough, no debts, and have some rental income to live off until 59.5 when we can withdraw from 401K/IRA account.
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Watty
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Re: Pension Annuity Distribution Options advice please

Post by Watty »

It sounds like 55 is the earliest you could start the pension so you have a few years until you need to decide. A lot can change by then so you might just want to put the pension decision on the back burner until then.

When you are looking at your Social Security projections be sure that it is based on you stopping working at different ages. It some of the estimates default to assume that you will keep working.
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Watty
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Re: Pension Annuity Distribution Options advice please

Post by Watty »

tdmtdv6 wrote: Tue Apr 28, 2020 12:30 pm ....and have some rental income to live off until 59.5 when we can withdraw from 401K/IRA account.
I just saw this other thread about being able to make early withdrawals from a 401k without a penalty because of the relief act which was just passed. I don't know anything about that, and it may not be a good idea even if you can do it but you might want to look into that.

viewtopic.php?p=5218531#p5218531
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rterickson
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Re: Pension Annuity Distribution Options advice please

Post by rterickson »

IRS Section 72(t) rules allow penalty free retirement account early withdrawals, but you will have to make them for at least 5 years continuous.
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#Cruncher
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Re: Pension Annuity Distribution Options advice please

Post by #Cruncher »

(Here is the table from the original post reformatted to make it easier to read:

Code: Select all

	                         as of 6/2022     as of 6/2027      as of 6/2032
                                 You    Bene       You    Bene       You    Bene
                               ------  ------    ------  ------    ------  ------
Single Life Annuity            $1,026            $1,327            $1,499 	
5 Years Certain and Life       $1,016 [$1,016]   $1,306 [$1,306]   $1,459 [$1,459] [1]

 25% Joint & Survivor Annuity    $985    $246    $1,263    $316    $1,412    $353 
 50% Joint & Survivor Annuity    $948    $474    $1,205    $602    $1,334    $667 
 75% Joint & Survivor Annuity    $914    $685    $1,152    $864    $1,264    $948 
100% Joint & Survivor Annuity    $881    $881    $1,103  $1,103    $1,202  $1,202

 50% J & S Pop Up Annuity        $939    $469    $1,187    $593    $1,304    $652 
100% J & S Pop Up Annuity        $866    $866    $1,073  $1,073    $1,155  $1,155
Stinky wrote: Mon Apr 27, 2020 10:56 pmThe amounts quoted are all “actuarially equivalent” ...
This doesn't appear to be the case, particularly between the options to take at age 60 or 65. As the following table [2] shows, the probable present values for both the single life and 100% joint life are much less if begun at age 65 than at age 60. This isn't surprising since the single life at 65 pays only 13% more than at 60 (1499 vs 1327); and the 100% joint life pays only 9% more (1202 vs 1103). By comparison delaying social security just three years from age 62 to 65 increases the benefit 24% (86.667 vs 70 according to the bottom row of this SSA web page). And SS is inflation indexed while the original poster's pension is not!

Code: Select all

                     Probable PV $000
                      Starting at Age
Disc                 -----------------
Rate    Type          55     60     65
----  ----------     ---    ---    ---
 2%   Single         248    246    204
 2%   Joint 100%     262    265    226

 3%   Single         218    209    168
 3%   Joint 100%     225    221    183

 4%   Single         194    179    139
 4%   Joint 100%     197    186    149
  1. The three bracketed amounts for "5 Years Certain and Life" appear to be typos. They should likely be blank the same as for the previous row, "Single Life Annuity".
  2. The table shows the present value (PV) at age 55 of the survival-weighted benefits when discounted at 2%, 3%, and 4%. I computed them with my Longevity Estimator spreadsheet for a man / woman couple both age 55 with mortality represented by the 1970 SSA Cohort Life Table.
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Stinky
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Re: Pension Annuity Distribution Options advice please

Post by Stinky »

#Cruncher wrote: Wed Apr 29, 2020 10:31 am (Here is the table from the original post reformatted to make it easier to read:

Code: Select all

	                         as of 6/2022     as of 6/2027      as of 6/2032
                                 You    Bene       You    Bene       You    Bene
                               ------  ------    ------  ------    ------  ------
Single Life Annuity            $1,026            $1,327            $1,499 	
5 Years Certain and Life       $1,016 [$1,016]   $1,306 [$1,306]   $1,459 [$1,459] [1]

 25% Joint & Survivor Annuity    $985    $246    $1,263    $316    $1,412    $353 
 50% Joint & Survivor Annuity    $948    $474    $1,205    $602    $1,334    $667 
 75% Joint & Survivor Annuity    $914    $685    $1,152    $864    $1,264    $948 
100% Joint & Survivor Annuity    $881    $881    $1,103  $1,103    $1,202  $1,202

 50% J & S Pop Up Annuity        $939    $469    $1,187    $593    $1,304    $652 
100% J & S Pop Up Annuity        $866    $866    $1,073  $1,073    $1,155  $1,155
Stinky wrote: Mon Apr 27, 2020 10:56 pmThe amounts quoted are all “actuarially equivalent” ...
This doesn't appear to be the case, particularly between the options to take at age 60 or 65. As the following table [2] shows, the probable present values for both the single life and 100% joint life are much less if begun at age 65 than at age 60. This isn't surprising since the single life at 65 pays only 13% more than at 60 (1499 / 1327 - 1); and the 100% joint life pays only 9% more (1202 / 1103 - 1). By comparison delaying social security just three years from age 62 to 65 increases the benefit 24% (86.667 / 70 - 1 according to the bottom row of this SSA web page). And SS is inflation indexed while the original poster's pension is not!

Code: Select all

                     Probable PV $000
                      Starting at Age
Disc                 -----------------
Rate    Type          55     60     65
----  ----------     ---    ---    ---
 2%   Single         248    246    204
 2%   Joint 100%     262    265    226

 3%   Single         218    209    168
 3%   Joint 100%     225    221    183

 4%   Single         194    179    139
 4%   Joint 100%     197    186    149
  1. The three bracketed amounts for "5 Years Certain and Life" appear to be typos. They should likely be blank the same as for the previous row, "Single Life Annuity".
  2. The table shows the present value (PV) at age 55 of the survival-weighted benefits when discounted at 2%, 3%, and 4%. I computed them with my Longevity Estimator spreadsheet for a man / woman couple both age 55 with mortality represented by the 1970 SSA Cohort Life Table.
I was probably being a little loose if I implied that the amounts were fully actuarially equivalent. I’m pretty confident that the various options provided for a certain claiming age (like 60) are equivalent; however, the plan could have various internal subsidies that make it less desirable to start drawing at 55 than at 60.

Social Security age adjustments are politically set. To the extent that they happen to be actuarially equivalent, that’s a pleasant outcome.
It's a GREAT day to be alive - Travis Tritt
rich126
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Re: Pension Annuity Distribution Options advice please

Post by rich126 »

I'm curious. Since it isn't a COLA pension, would you want to start getting it sooner? Even if you don't need the money since you could then invest it and hopefully the investment would equal, if not exceed, inflation?

Or is that already included in the numbers?

(My GF is waiting on getting similar numbers from her ex-employer regarding her pension so I'm just trying to understand these things better.)
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FiveK
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Re: Pension Annuity Distribution Options advice please

Post by FiveK »

rich126 wrote: Wed Apr 29, 2020 11:46 am I'm curious. Since it isn't a COLA pension, would you want to start getting it sooner? Even if you don't need the money since you could then invest it and hopefully the investment would equal, if not exceed, inflation?
That's one consideration. Another consideration: if one has a significant traditional account balance, delaying the pension would allow Roth conversion at lower marginal tax rates.
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Re: Pension Annuity Distribution Options advice please

Post by ubermax »

Some very good thoughtful replies so far , David Jay, Stinky, & Watty come to mind ; if you're also looking for a mathematical comparison of the options , I would strongly recommend requesting a "relative value" summary/report from your former employer - it's something that would be fairly easy for the actuarial or consulting firm retained by your former employer to produce and I'm a bit surprised that you weren't given one - but you can still request it and there might be a small fee but well worth it -

The nice thing about this report is that it would be based on the actual interest rate and mortality table assumptions that underlie all the amounts that you provided - these assumptions are found in the pension plan document .
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Watty
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Re: Pension Annuity Distribution Options advice please

Post by Watty »

Stinky wrote: Wed Apr 29, 2020 11:15 am I was probably being a little loose if I implied that the amounts were fully actuarially equivalent. I’m pretty confident that the various options provided for a certain claiming age (like 60) are equivalent; however, the plan could have various internal subsidies that make it less desirable to start drawing at 55 than at 60.

Social Security age adjustments are politically set. To the extent that they happen to be actuarially equivalent, that’s a pleasant outcome.
When you stat dealing with statistics and actually numbers it gets tricky real fast and from what I understand the OP would have a much different life expectancy than the Social Security tables because;

1) The OP is apparently male and males have a shorter life expectancy.

2) The OP was in good enough health to work long enough at a job to qualify for a pension.

3) The OP is married and married people tend to live longer. It is not clear is this is because marriage is beneficial or less healthy people are less likely to be married.

4) When people have the choice to start a pension early or take a lump sum then the people with poor health will tend to start it early or take the lump sum. This also impacts what option they take for the survivor option.

From what I have read when an individual annuity is sold these are taken into account but so much for a group pension calculation.

A lot of which option to take is not so much a mathematical decision but based on what your needs are.
PVW
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Re: Pension Annuity Distribution Options advice please

Post by PVW »

#Cruncher wrote: Wed Apr 29, 2020 10:31 am

Code: Select all

                     Probable PV $000
                      Starting at Age
Disc                 -----------------
Rate    Type          55     60     65
----  ----------     ---    ---    ---
 2%   Single         248    246    204
 2%   Joint 100%     262    265    226

 3%   Single         218    209    168
 3%   Joint 100%     225    221    183

 4%   Single         194    179    139
 4%   Joint 100%     197    186    149
The apparent reduction in PV at age 65 is significant.

OP (tdmtdv6) are you sure you're not missing a detail like an early retirement SS leveling option that reduces the pension payout when you claim SS?
GAAP
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Re: Pension Annuity Distribution Options advice please

Post by GAAP »

In a similar situation, I did an NPV analysis of the different age income streams, using my life expectancy, and varying inflation rates. In my case, the higher the inflation rate, the earlier I should claim it (with a breakeven around 2%).

However, I'm also on a multi-year plan to do Roth conversions, and any pension claimed would reduce the amount of conversions. Therefore, my current plan is to complete the conversions, and then repeat the analysis at that time.
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