I would imagine that the pension picks a number that will work for the entire class, regardless of the health or relative ages of the two people.
If you are healthier than average or will need the insurance for a shorter than expected time, maybe you can come out ahead by maximizing, because the insurance in this case would be cheaper than the pension plan’s. Although part of that would be offset by the fact that if the beneficiary dies first, the pensioner’s benefit is still permanently reduced.
Maximizing seems risky though. You have to somehow guarantee that the life insurance policy will never be allowed to lapse, and the cost will remain fixed no matter how long you live.
This is the risk. Easy to read now, hard to plan for, especially between retirement age + 20 years, when the pension is fixed and risk of lapse is great.
When DH retired we also had to consider health insurance. He is much older. St that time, without survivor benifits I would have had no access to health insurance until Medicare.
tom1944, I definitely need to look into specifics of survivor benefits, as opposed to just talking to people who may or may not know the correct details. I believe there are different options for survivor benefits, and you can just take a 12K yearly pension hit, but then the survivor only gets 50%. This stuff is so complicated, as who really knows how long they will live?
@busdriver11, its morbid discussing whose family issues will cause them to go first. My wife and I are basically the same age as we have a 3 month difference. We have talked about this but we don’t have to make a decision for another 8-13 years.
To us, it was what allowed us to sleep well at night. We don’t care if we didn’t make the BEST choice financially, as long as we made one that is good enough and allows us the reassurance that the survivor will be OK and that we can live on the reduced pension amount without problems.
For us, the current defined benefit pension amount is reduced by some % (10% to less), depending on the % of pension the survivor of the retired employee is to get, with a maximum of 55%. We chose the 55% because we are OK with the 10% reduction in our current pension with the assurance that this stream of income will help me if H predeceases me.
If the 10% reduction is a great hardship now and I would have independent funds I could live on in the future, the calculation might be different. H is currently older and even term life premiums for folks his age are high, if he can even be insured. We figure I can live comfortably on the 55%, my SS, and whatever assets we haven’t spent if I survive H. Trying to imagine all the possible future scenarios can just make one crazy. As it is, we probably will leave a nice estate for our kids and potential grandkids. That seems good enough to us.
Just a suggestion: perhaps you should try to separate uncertainty from risk.
Uncertainty can be minimized by knowing all the facts relevant to your particular situation. No one can speculate and give you good advice, least of all seemingly “financially savvy” people. Your company’s DB plan documents are legally yours to read. Knowing how they work in your case will go a long way towards minimizing uncertainty. Then you can proceed with formulating alternative decisions.
Risk is inherent in any decision. But if you have minimized uncertainty, then you can better weigh the risk from alternative decisions.
Read about a product combination that I had not heard about before. It was in a Commentary column by Anya Kamenetz; she interviewed Alin Lozada of Sarasota FL - he is a financial advisor (24 years) and is a retirement income certified professional (designation from American College of Financial Services).
What should I do about long-term care? “Long term care is the no. 1 thing that will devastate a portfolio”. Compare it to other situations we typically insure against. “You have a 2 percent chance of having your house burn down, a 6 percent chance of getting in a car accident, but a 70 percent chance of needing some type of care before you pass away.” If both spouses have health issues for several years, it can wipe out a lot of money - even if one is lucky enough to have a few million dollars in the bank.
Some of this guy’s clients put a portion of their IRA into a policy that rolls up LTC insurance with an annuity and a life insurance policy. Depending on what life brings, you can draw the annual income from the annuity for a while, then convert to the care benefit, and finally leave the insurance policy to your kids.
I think being able to include LTC insurance to your safety net helps if you can qualify for a policy. Get it before you have a health situation that doesn’t allow you in.
Like Himom we have to take a % off depending on how much we leave our spouse. If I was to retire at 62 using my current salary my pension would be a max of between $77-78k. I plan to take the option to leave my spouse 100% even though her health is far worse than mine. That would reduce the pension to $68-69,000.
The pension survivor’s benefit is an area where I really had fun. A spreadsheet with possibilities involving 3 different pensions and 2 SS payments, and how much either of us will have if the other checks out early, given single life, 100%, 75%, or 50% payouts on each pension, and various retirement dates and pension commencement dates. At the time, we only had to make a final decision on one pension, but it was a fun puzzle. Maybe I should start doing something like this for pay.
SOSConcern, anything someone is selling that rolls up LTC, life insurance and annuities sounds like a good way to transfer my money to a salesman. Tread with caution.
Without your permission :), I will use you as an example for the “implied wealth of pensions,” which is something the financial columnist Scott Burns has written about. And it goes as follows:
An annual $69,000 pension payment, using a SWR of 4.0% requires a portfolio of $1,725,000.
Using a SWR of 3.5%, it requires a portfolio of $1,971,400.
@AttorneyMother, the SWR assumes that it will be COLAed each year after the first, so it can’t directly be compared to a nominal annuity. Still, a pension of $69k beats a sharp stick in the eye
One thing to keep in mind is that folks MAY benefit from “some assistance” without QUALIFYING for LTC policies to kick in. This means that a person COULD benefit from hiring someone to help with driving, errands, cooking, household chores but still technically be able to perform the “activities of daily living.” This is a lot more common that folks realize. They ASSUME that when they need help, the policy they’ve paid for will AUTOMATICALLY agree that they qualify for benefits. Many have found to their shock and expensive disappointment that the perceived benefits and qualifications do NOT match what they THINK they purchased.
I’d read VERY carefully to be sure you understand what you ARE purchasing and what the requirements are before you qualify. The requirements are quite specific and they will not waive the requirements and may deny benefits and require you to fight to get payments.
When H’s employer (the federal govt) first started encouraging its employees to get LTC insurance and would waive medical exams, etc., we looked over all the policies carefully and even met with a MetLife agent. Basically, until you CANNOT physically (or mentally due to dementia, etc.) perform 2, 3, or 4 of the basic activities of daily living (ADLs)(depending on the terms of the policy), you do not qualify for ANY benefits. These activities include transferring from bed to chair, toileting, feeding yourself, and other VERY basic things. My aunt with severe lung cancer did not qualify for ANY benefits until the last month of her life, although she had paid premiums for decades and would have benefitted from additional care and assistance. She still COULD (slowly and painstakingly) perform those basic ADLs until nearly the end of her life.
Attorneymom doesn’t that assume the pension is never depleted? Remember the pension money only has to last until the average age of death of the entire pension pool, So in reality if that age is on average 84 and the average pensioner retires at 62 there must be enough funds to last 22 years.
The pension says that if I want a lump sum it would be about $680,000. They calculate that by assuming a return of 7.75% and having a zero balance left at 84. The plan has averaged 8.9% over the last 35 years.
Yes, that’s correct. Presumably the person with the portfolio would have an estate to leave to his heirs, but I’ll blame Scott Burns for the quick and dirty comparison. It’s an old column, and he was talking about DIY retirement savers (like myself and H) and comparing them to retirement savers with DB plans:
On top of their other problems, current LTC policies usually have a maximum daily benefit (as low as $50/day, usually $100/day, seldom as much as $500/day. OR, they might have a maximum lifetime limit of $300k - $500k. Those benefits are after a waiting period. The premiums are allowed to be increased, although I believe the state insurance commission has to agree. There are reports of some companies being reluctant to pay out (quelle surprise).
When you factor $50/day or $100/day benefits, you have to figure that’s offset by the restaurants you’re not going to, the golf you’re not playing, the vacations you’re not taking, etc. $500/day is a bit more meaningful, today, but how about 20 years from now?
Older LTC policies might have been worthwhile. Might. I think today’s are not (just my 2 cents). Mix them with other products and nobody will ever be able to guess which cup the ball is under in that insurance shell game.
@MomofJandL , May I ask what your conclusions were after reviewing the options? I suspect if we opted for 100% continuance for my husband’s pension (he’s the main earner) I would be paranoid enough to curtail some of the more adventurous trips we’d like to take in retirement. I might even have to be nice to him to optimize his heart health.
The term life policy we purchased 20 years ago expires next month. We were paying 0.1% of the contract value annually and the new premium would be about 1.5%, so we’re not renewing. Looking back I’m amazed at how affordable it was and thankful to see it expire unused. And my husband can relax now when we hike on steep canyon trails :-"
