Here’s a question I received from a reader:
My wife and I were starting to look at paperwork for her retirement from full time teaching.
One of the options we need to decide is survivor rate.
We looked at survivor rate in that there are 4 options.
Here is a simplified breakdown.
- 0% survivor rate would mean she would get X amount a year in pension. For example if she would get $43k a year pension and I would get nothing if she would die and no healthcare coverage which is the major factor.
- 50% survivor rate would be $41k a year in pension still get healthcare coverage included but if she were to die I would only get $20.5k a year
- 75% survivor rate would be $39.5k a year in pension, healthcare coverage included but if she were to die I would only get $29,625 a year.
- 100% survivor rate would be $38.5k a year in pension, healthcare coverage included but if she were to die I would get $38.5k a year.
If I were to die all these decisions would be off and she would get 100% of her pension or $43k a year.
Basically the difference is about $2,000 to $1,500 to $1,000 a year difference. So if I never worked and NEEDED my wife’s full pension I would need the 100%.
If I was a worker that did not save enough and had my own 401k saving amount maybe the 75%. Seeing that I have a well-funded 401k I am leaning to taking the 50% survivor rate because the healthcare coverage would be a major decision maker of possibly retiring early.
I really don’t need my wife’s full pension as I have saved quiet well in all my tax savings account but I figure the extra $2,500 or $1,500 from her pension would be nice but I would like something if she were to die and $2k a year is worth having 50% something of her pension and her health coverage.
Someone once also suggested if we don’t feel comfortable with the 50% pay out to get an insurance policy so that if she were to die it would offset the cost of taking the better payout of pension money. An example would be a $100k insurance policy at around $60 a month for 10 years. If she were to die suddenly then I have 5 years to supplement the 50% survivor pay out where I am only getting half of her pension.
I am passing this by you and your readers to see if this is sound thinking or I am I missing something.
What’s your advice for him?
I have very limited knowledge about pensions (and boy is this topic morbid!) but I like the 100% option better. I’m low risk though. How is her health? Age? Risk?
Mr. Freaky Frugal says
I agree with Lily – it really depends on overall health and mortality probabilities.
You can find various detailed calculators on the interweb where you can answer health question and get estimated longevity. I would do that and then run the numbers.
If the healthcare coverage is very important to you, I would rule out the 0% option for that reason alone.
Jeff B. says
I am doing the 100% single life option. My wife will have plenty of money without my pension when I am gone.
Accidental FIRE says
Being that the reader has saved well and doesn’t need the pension money, I agree with him that the 50% would probably be best here, which would get him the healthcare. That’s a biggie, assuming the healthcare coverage is good and at an affordable rate.
Married My Pension says
Better coverage than what I can get through my work ( copays, deductibles) and just a little cheaper price.
I would go with 50% to get the Health Care coverage. Health care costs in medicines, MDs, rehab, hospitals, etc are only going to go up. Just as Health Care Ins will too but if you are retired then it will be all the Parts of Medicare.
What I do know is as gov’t employee I will be able to continue my current excellent very affordable Health Care Insurance as my Medicare Part B at an excellent rate. Focus on quality Health coverage. On another morbid view, statics are stacked against the husband outliving the wife in general. Women often outlive their husbands by 10-20 years hence us females needing to save more for retirement.
Good luck My understanding as gov’t employee that you only get to make this choice once with the pension. Might want to check her teacher’s pension rule on this too.
I think you go 100%. Reducing her pension by $4.5k a year, with the possible “upside” (well, not really, since it means your wife pre-deceases you) of receiving her full pension for as long as you outlive her (rather than 50% or 75%) seems like a pretty good trade off, particularly when you consider that your own retirement savings are adequate (so that if you predecease her, she’ll end up with more than enough money to make up the $4.5k a year she “lost” by taking the 100% pension route).
I mean, do the math. Let’s say she lives 10 years, and dies (0% is out because it doesn’t include the health insurance, which you correctly should want):
– At 50%, that means she “lost” from her pension $20k ($43k-$41k X 10= $20k) ignoring interest on that amount); you’d have to outlive her a full year ($20.5k) to recoup it
– At 75%, that means she “lost” from her pension $35k; you’d have to outlive her by a little more than 14 months to recoup it.
– At 100%, that means she lost $45k from her pension; you’d have to outlive her by 14 months to recoup it.
However, once you pass that 14 months outliving her point in time, you’re going to end up FAR ahead with the 100% over the 75% or 50%.
The numbers change (obviously) if she lives 15/20/25 years before predeceasing you (the longer she lives, the less likely you’ll “recoup” the lost pension reduction and/or come out ahead)….but for just a $4.5k reduction each year, I’d consider strongly going 100% option, just in case.
Mr. FWP says
I will leave you with more questions than answers here:
1. You read my mind: have you priced out life insurance? Because then you can start comparing apples with apples here. You can compare those benefits with the costs. It won’t solve the health care part of the equation (good luck estimating costs reliably on that – either way), but it will solve the survivorship question.
2. Bigger picture: how reliable is the pension guarantee on healthcare? In some places, the local legislature can change all that on a whim. Or erode its value over time. And so on. It’s harder to do that with actual guaranteed cash payouts, but my understanding is that it’s easier for places to do so with added benefits like healthcare. You may want to check into that before assuming that this “guarantee” is worth full value.
3. On the margin: how well-funded and stable is the pension itself? If your pension system is assuming it will make 7+% yet is locked into only AAA-rated investments…well…I wish them the best of luck with that, I really do. That, too, might impact how I value it.
You didn’t say your age, but I am guessing, since you’re asking this question, that you’re either young and starting out, so this is all very far away, or you’re very close to retirement and sorting out various guaranteed options. That, too, might play a part in the decision…
And with all that said: you’re doing well, I wouldn’t stress over it; make the best decision you can with the information you have now and hope pray for the best.
Married My Pension says
My wife is 54 and I am 55.
I am still looking to work until 59 1/2 and see where I am at then.
Mr. FWP says
Then, for you, it’s easier to guess at what the situation will be when you’re 60 and retire. There’s also some great advice below.
There’s no right answer or perfect answer. It’s hard to even know, for instance, where healthcare will be at in 5-10 years. It could be free for everyone or the costs could continue rising unsustainably. Who knows.
I’m a financial advisor and I deal with this question frequently. One thing I remind every person that frets about making the “wrong” decision:
Remember that, from an actuarial perspective, each of these options costs the pension the exact same amount. They have an actuary that calculates all these options and there is no financial difference to the pension which you choose. They might feel different because the payout IS different, but the actuary will tell you none is better than the other.
Unless there is some sort of guarantee (i.e. guaranteed to receive the pension for at least 10 years even if your wife would die in the first year) I always advise what you’re already leaning towards: don’t take the 0% survivor option.
Beyond that, others have already given good advice. How much do you “need” the extra money. How detrimental would it be if she died 6 months after retiring and you only received 50% from that point forward? $200 per month isn’t a lot, but $1,700 a month is a game changer.
My wife took her 21 year teacher pension at age 65 and we took the 0% option to receive $9899 per year. With her genes she will live a long time and probably outlive me. I still will be able to get health insurance thru her system but the premiums will increase significantly if she predecesses me.
[email protected] says
My wife and I will be in this this situation in about four years. We have already concluded that we will go with the 100% survivor rate. Mainly, nothing changes. While she is living, you will have $38.5K/year and health care. You will adapt to that. If she dies, you will still have $38.5/year and health care. All you will have to fill out a paper and provide death certificate. Then you will not have worry about changing your budget if you choose the 50% or 75% survivor rate. Why worry about life insurance, etc.
Also, if you die first, she will go up to the $43K/year. She gets a raise, you better sleep with one eye open. Ha ha.
One extra thing, make sure you have power of attorney on her pension. This is in case you need to make changes in the pension or healthcare if she is incapacitated.
Paper Tiger (aka MI 27) says
I went through this same decision about 6 months ago when I turned 60 and started my pension. The difference for me between 50% and 100% survivor benefits was about $400/mo. I ran some numbers and looked at me passing at 80, in 20 years, and my wife passing at 85. She is almost 4 years younger than me so this would assume she lives 9 additional years after I pass.
Over the next 20 years, the extra $400 per month while I am alive would mean an extra $96,000 in pension payments. At 50% of my pension, my wife would receive $247,050 over the remaining 9 years of her life. At 100%, she would receive $450,900 over the same period or $203,850 more.
Based on all of this, I opted for the 100% survivorship payment.
Most of the good advice has already been given. But, if you’re interested in getting insurance and taking less percentage survivorship, the term is called “pension maximization” . I used to work at an insurance company in a role that supported the agents. We had calculators that would run different scenarios. A google search of that term brings up a few. It isn’t something that I’ve dealt with in years, so I don’t have any specific recommendation on which to use.
I don’t feel there is a right or wrong decision here. Lay out the options, and make the best decision that makes you comfortable. It sounds like you are doing just that. Good luck.
Take a reduced option and supplement with term life insurance. You’ll get to keep the health insurance and likely come out ahead financially. If you die first she’ll get 100% and it will all be mute.
Harry Sit says
Forget the 0% option because it doesn’t come with healthcare. Deciding among the other 3 requires calculating the present value of each option. The plan’s actuarial assumptions may not be reasonable because the plan may be allowed to use certain mortality tables that bias against females or outdated interest rate. You shouldn’t just wave your hands and just wing it thinking they are equal. The difference can be very large. Find an actuary or a reliable calculator (and make sure you fully understand how to use it).