Any advice on picking a level of survivorship benefits for a small pension?
What’s the best way to analyze the options? Is there a point at which it might be advantageous to “self-insure”?
There’s only four options:
0% survivorship benefits leaves monthly benefits at 100%
50% survivorship benefits reduces monthly benefits to 79.4%
66.7% survivorship benefits reduces monthly benefits to 74.3%
100% survivor benefits reduces monthly benefits to 65.8%
This is a small pension (even 100% survivor benefit option would only give Dear Spouse $12k/year), but small amounts can add up. For reference, I’m still working at 65, probably for the next couple of years, and have retirement investments as well as (hopefully) Medicare then.
Is there a sweet spot with the numbers or is this really a completely subjective equation?
Thanks in advance for sharing your thoughts and/or advice!
A few random points. We would need to know your age and the age of your spouse, as well as both of your genders to determine average life expectancy and any breakeven point. You can run a TVM on each amount. Does this come with any COLA adjustment?
One of the things I used to do to determine if someone should select the survivorship option vs single life is compare the difference and how much life insurance that could buy on you. For example:
100% benefit is $1000 a month.
50% Survivorship pays $794 a month. Spouse gets $397.
How much of a 20-30 year term policy could you purchase with the difference ($206)? Can you pull $397 (the 50%) or more off of that term policy for that 20-30 year period? If so, go straight life and purchase the policy. If your spouse dies first, cancel the policy and bank that extra $206. If you go first (but much later), your spouse will be able to spend even more than $397 a month. Same process on the other survivorship options.
Most of this likely comes down to the differences in life expectancy for the two of you. One last thing - I almost forgot - you will want to see if your pension has a “pop-up” provision that allows you to revert to 0% survivorship if your spouse dies first. Those options are not common but they are more frequent than they used to be. Such an option would of course make picking a survivorship option less risky.
That’s very helpful. I can see I have more number crunching to do!
My wife is significantly younger than myself, so I’m assuming that may weight things more towards going full in on the survivorship benefits, whether through the pension (it’s a state employee pension from a previous career) or through a life insurance policy.
I don’t think there is a “pop-up” provision, but will check. Thank you!
In this state, the spouse apparently has to sign off on it if you choose zero survivorship benefits. Given a 20 yr age difference, the odds are that Dear Spouse will survive me, so it seems pragmatic as well as diplomatic to make sure she’s taken care of - but I didn’t want to assume that maxing that out would be the best call.
When I. crunch some basic life expectancy numbers, the total Pension Payout to us as a couple is maximized by choosing the 100% survivor option, but again, there may be more than one way to look at this. It’s kind of a big decision that I’ve unfortunately allowed to sneak up on me without enough prior consideration.
In my limited experience, the pensions I have (or have heard of) were a fixed monthly amount. It might be worth trying to factor inflation into the calculations - hopefully done by whatever took you use. The extra years your spouse seems likely to collect could have a seriously lower buying power than that of the 100% option collected sooner.
Is your survivorship amount determined based on her age? In other words, is it less because she is younger? My guess is no (though it should be) and if it isn’t, that would weigh even heavier toward some level of survivorship.
I also opted for 100% of Her pension to go to her.
Essentially, my choice was all about her.
Those two choices give her the highest amount of guaranteed income in my ‘absence.’ Those plus SS are plenty. The cash our portfolio makes is an add-on.
She is not an investor. She knows nothing about stock, ETF’s, etc.
This allows her to never be concerned about our portfolio. No management needed.
I do not want her to worry about money and in particular, have to rely on some other person for investing advice.
If I end up as the survivor, I can easily make it on my SS plus our portfolio.
Most of the time, the choices are actuarily equal. That’s how they calculate the levels!
However, if you have specific knowledge about yourselves that are out of the actuarial average, you can use that knowledge to inform your choice. For example, if the survivor is much younger or much healthier than average, you would choose the higher survivorship benefit. But if the survivor is older than average or less healthy than average, you wouldn’t.
We should point out that this decision is not cast in concrete. As circumstances change you can usually revise the answer. Of course you are providing for unexpected sudden death of one of the partners. Always good to have an up to date plan in place.
My wife has a small pension. She had to make this choice, and it was irrevocable, at least according to the form. It’s so small that I didn’t bother checking laws to see if that’s true.
But as I am 8 years older than her, we elected to keep it 100% for her, because actuarily speaking I’ll go before she does. With a 20 year age gap, I would automatically designate the younger person to receive the benefit, absent any obvious health issues or defining family history.
My company pension, at the time, '02 only offered the 50% spousal option, but later, they offered a complete buyout, for a fair chunk of cash, however, att he time we couldn’t find an investment that could not only cover the pension, but also the healthcare & dental coverage, so we declined, gambled on it continuing, and it has/ But as we talked to an advisor, he pointed out that there was an option in that offer, to bump the spousal benefit to 75%, so we did that… There is also a pop-up, where it reverts tot he full amount if she goes first… Hey, have a cookie! So 24 years later the pension/benefits continue, still well funded for the survivors…
Thank you all for your thoughts, experiences and advice - it’s been helpful in thinking this through. In the end, it looks like the data leads us to the same place my gut did, hence an extra bonus towards peace of mind to not have a conflict there.
Now if I can only figure out whether or not it’s worth it to buy more service credits.
I’d always planned to go back to this employer in my new career for 5 years, which would have bumped my pension up quite significantly - but I really liked where I was working and decided that the Quality of (Work)Life equation took precedence. Now that window has probably passed… :-/
Anyway, thank you all again. It’s especially nice to see some names I remember from the MF boards of yore of decades ago!
So 24 years later the pension/benefits continue, still well funded for the survivors…