Author Topic: Need help choosing our pension payout option  (Read 3940 times)

Groovin Old Hippie

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Need help choosing our pension payout option
« on: March 08, 2016, 05:24:48 PM »
My DH will be retiring on March 31. We would like to hear thoughts about what option to take regarding his pension.  He is 62 (63 in June) and I am 59. When he retires we will be totally debt free, including a paid off home. Our essential payments (utilities, insurance, property tax) will be approximately $650/mo. We're adding $850/mo for everything else (food, home and vehicle maintenance, camping, etc). Based on our current circumstances $1,500/mo is a realistic budget for us. The rest of the money from the pension and SS will go into savings.

Social security: He will get $1752/mo by taking it at 63. When he dies I will get close to the same amount. I have no SS earnings of my own.

We have $370,000 in a 401k which will be moved to index funds once he retires. We don't plan to touch this unless an emergency comes up that we can't cover.

Pension option 1:

$2545/mo until he dies
$1272/mo for me after he dies

Pension option 2:

$4846/mo until he turns 65 (2 years, 2months)
$2256/mo when he turns 65 until he dies. When he dies I will get nothing.

Does it seem wise to take Option 2 knowing that I will only get his SS after he dies? He is in great health. Me, not so much. Not like I'm going to die tomorrow or anything but there is a good chance I'll go first. We would like to have the extra money up front to invest and possibly do some extra traveling. We only get one shot to make this decision so we would value any input.

EDIT Just found out we will have to pay our own health insurance at the company rate of $1031/mo. That brings our monthly total in retirement to $2500/mo. Going to continue investigating MDM's advice.
« Last Edit: March 09, 2016, 01:03:29 PM by Groovin Old Hippie »

aperture

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Re: Need help choosing our pension payout option
« Reply #1 on: March 08, 2016, 05:40:39 PM »
I am certain that there are more qualified voices to hear from, but I would point out that your DH will have to take payments at age 70.5 from any deferred-tax retirement account.  It sounds like the $370K is in such and account, so it seems likely that you will be getting much more money than you have presently accounted for at that point.

With that said, I am still not clear on why you might consider option 2.  It sounds like the $s coming in from option 1 and SS are more than 2x your needs- that seems like plant of money for travel and investing.  If you took option 2, there is the risk that your DH could pas away suddenly leaving you with nothing but the SS and the retirement account.   

Also if you are saving for a specific goal - like leaving an inheritance or endowing a charity, you may want to involve a professional in discussion of planning for asset transfer.  It is so easy to have all your savings go to taxes and nursing homes in the end. 

Best wishes Ap.

Groovin Old Hippie

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Re: Need help choosing our pension payout option
« Reply #2 on: March 08, 2016, 06:02:46 PM »
Thank you so much for your reply. Most of our family and friends say to take Option 2 to get more money upfront. We didn't even consider the age 70.5 account thing. So much more to think about!

MDM

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Re: Need help choosing our pension payout option
« Reply #3 on: March 08, 2016, 09:01:20 PM »
So much more to think about!

I'll assume you will roll the 401k into a traditional IRA - correct?

Can he defer the pension and get a higher monthly amount in return for starting it later?

Beyond the 401k to IRA rollover, here's another option for even more to consider:
1) Defer Soc. Sec. until he reaches age 70
2) If the pension can be deferred, withdraw ~$39K/yr from the tIRA.  This puts you at the top of the 10% bracket, and you'll pay ~$1800 in federal tax, plus whatever in state tax.  Keep $18k/yr for living expenses, and put the remaining ~$19K/yr into a Roth IRA.  By the time he reaches age 70.5, there will be very little in the tIRA, but a good amount in the Roth, and the SS income won't be taxed much so you should be in good shape.  And that's without any pension at all....
3) If he has to take the pension (or, if he can defer it but gets very little in return for doing so), then follow a strategy similar to #2 but convert tIRA->Roth up to the top of the 15% bracket.

The general idea is to take advantage of very low tax rates on tIRA to Roth conversions if you can defer SS (and maybe the pension).  You get the higher SS payments by starting later, giving better protection against running out of money if you live longer than expected.

This may be a lot to take in, and some details have been glossed over, so ask away if needed....

Groovin Old Hippie

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Re: Need help choosing our pension payout option
« Reply #4 on: March 08, 2016, 11:07:41 PM »
WOW MDM!! That is definitely a lot to take in! Thank you so much for your response. We have much research to do. We didn't even know we could roll over the 401k into an IRA. We'll find out about deferring his pension. I may have questions for you after I find out some answers.  :)   

dess1313

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Re: Need help choosing our pension payout option
« Reply #5 on: March 09, 2016, 12:19:48 AM »
Pension option 1:

$2545/mo until he dies
$1272/mo for me after he dies

Pension option 2:

$4846/mo until he turns 65 (2 years, 2months)
$2256/mo when he turns 65 until he dies. When he dies I will get nothing.

do not assume that that option 2 means you will both live to the ripe age of 105.  i'm sorry to be a downer in the conversation, but i work in healthcare, and your lives could change drastically tomorrow, or the day after or next year.  the part about "when he dies i get nothing" is scary.  could you survive for an extended length without that pension?  i believe it would be very difficult from the bit i see about your numbers.  They only offer you the higher payout because statistically they know the average age of most people is fairly low.  the chance he is going to stick around until a 105 is statistically against you.

Dee18

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Re: Need help choosing our pension payout option
« Reply #6 on: March 09, 2016, 06:20:47 AM »
Take option 1. My father was 5 years younger than my mother and in better health, in fact outstanding health at 62---playing tennis 3 days a week, building houses for Habitst, golfing a couple time a week.  He opted for a version of your pension #2 with his pension.  He died in his 70s soon after a diagnosis of pancreatic cancer.  My mother is still living in their home at 92.  Fortunately, they had plenty of investments so she is fine financially, but I learned you cannot predict death. 

FrugalFan

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Re: Need help choosing our pension payout option
« Reply #7 on: March 09, 2016, 06:47:25 AM »
If you don't think you could live decently without his pension, then the only option is #1.

Rural

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Re: Need help choosing our pension payout option
« Reply #8 on: March 09, 2016, 08:04:26 AM »
We'll be taking the equivalent of option 1 on my pension despite the fact that I'm likely to outlive him by decades. He will get a pension, but much smaller, and I'm not willing to expose him to that risk.

Catbert

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Re: Need help choosing our pension payout option
« Reply #9 on: March 09, 2016, 11:53:26 AM »
I would take option 1, because it seems like the safest option.  You don't need the extra upfront money.  That option is usually called "Social Security Leveling" intended to give more money until collecting SS.

I second the suggestion to put off taking SS as long as possible (or until 70) since your DH is in good health.  Is there longevity in his family?  For every year he delays taking SS the monthly amount he gets grows by ~8%.  The break even point is generally about age 83.  If one or both of you live beyond that age, you are money ahead.

Cassie

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Re: Need help choosing our pension payout option
« Reply #10 on: March 09, 2016, 03:27:27 PM »
When we retired both my hubby and I choose Option 1. WE both wanted to be protected. You can use some of your nest egg to travel.

southern granny

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Re: Need help choosing our pension payout option
« Reply #11 on: March 09, 2016, 03:49:33 PM »
Just for the peace of mind, I took something similar to your option 1.    Will you be able to draw social security off of his account when you are 62?

 

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