Pension Payouts-Help me choose

[Jana]

My husband will be retiring soon at 50. These are not exact numbers but close.
Pension payout choices
A
Hi will get a pension of 10,000 a month. And it will drop 40% when he passes away. I will get that 60% for life

or B

Get a set amount-about $800 less each month. But I will continue to get it for life after he passes.

Which would be the wiser choice?

We will have a term life insurance until 67
And he plans on having a second career and piling up money over the next 10 years
House will be paid off at retirement
Rental will be paid off 5 years following that-produce $1000 a month income
2 million in term life insurance

Advice please

[bogart]

Are you two about the same age?  Are you both as far as you know in good health?  On average, how long have the older generations in your family lived?  His?  Has anything (big) changed between their generations and yours, for example, they were all chain smokers or coal-miners and you're not (or vice versa!). 

Do you have any dependents, and if so how old are they?

[Another Reader]

If you are much younger, in much better health, and/or have greater longevity in your family, then the 100 percent continuation of the pension with the lower initial payout may be the better choice.  The term life insurance will also protect you if he dies before 67, but if he lives past the term expiration and you outlive him, you will have more income to replace the insurance.

If the house is paid off at the first retirement and he is piling up money for the next ten years, that's icing on the cake.  If you mean it will be paid off at the second retirement and the rental will be paid off five years after that, then I think the 100 percent continuation may give you more wiggle room, although the term insurance should make that less important.

If you take the lower payout, you are making a bet with the payer of the pension that if your husband dies first, you will live long enough that the extra 40 percent will outweigh the reduction in the early years.

[TomTX]

Well, how much life insurance can you get for $800/month?

Alternately - invest the $800/month difference. Assume 8% return.

Obviously, the longer he lives, the better off you are. At age 50, male life expectancy in the USA is age 81.5. Assume he's average.

That's $1,800,000 you accumulate by the quickie online calculator I just used.

Figure a Safe Withdrawal Rate (SWR) of 4%. That gives you ~$6000 you can withdraw from that lump sum each month.

Hmmm..... That worked out a little too neatly.

$4,000 from the residual pension + $6,000 from the investments means you keep going with $10,000/month perpetually

So, two approaches listed there.

Really, a heck of a lot depends on your health, his health, et cetera.

For an "average" person, it looks like the Option A is the better choice - especially if you are Moustachian in your approach.

If he has poor health, and you have great health/are much younger.... maybe Option B.

Heck, I'd be delighted with a $4,000/month pension.... ;)

[RadicalPersonalFinance]

Talk to a good life insurance agent with a good mutual life insurance company.

At 50 years old, the numbers work beautifully for Option A + permanent life insurance.  Take Option A and put maybe $400 / month into a properly designed cash value policy (designed for good death benefit growth and good cash value growth).  If he dies early, you will have a life insurance payout with income-tax free death benefit to make up the difference for you.  If you pre-decease him, he can cash out the policy and use the money or leave it as an inheritance for kids. If you both live long and happy lives, you can cash out the policy in later years, enjoy all of the money plus some decent investment growth in the cash values.  (50 is young enough that the cost of insurance is still low and a good agent can design a policy where all those options work well.)

That way is a win-win-win.

[Jana]

A little more information:

We are both in good health, both the same age and we will have a 22 year old and a 21 year old at age 50. By age 51 our primary residence will be paid off, we will not have any more obligations for college contributions for our sons. We will owe about 160,000 on a rental property where the rental income covers the expenses with about $60,000 equity.

His family lives forever but the men usually predecease the men and the same with my family. No smoking or premature deaths in either family.

We only have the pension and about 150,000 in retirement mutual funds. We are in CA so the cost of living is a bit higher. We plan to stay in CA because we like it here :)

Any suggestions are welcome.

[TomTX]

I would avoid any type of "permanent life" "whole life" "universal plus life" or anything other than fixed term life insurance. They have a great sales pitch, but that's about the only advantage over term life + invest the cost difference yourself.

Any type of "investing" or "cash value" type insurance is basically "crappy investment + big payout to the agent + term insurance" bundled together. And if you die, the insurance company keeps the "cash value."