Q: I will be 55 years old this year and I want to apply for my pension of about $500 a month.
My question is whether I should take the single life annuity of $500 a month or the "50% Joint and Survivor Annuity," which would give me about $30 less each month and give my husband about $250 a month if I should die before him.
He says I should take the entire amount since he will get his pension in a few more years (which will be much more than mine). He will take the "50% Joint and Survivor Annuity" so I will have some income if he should die before me.
I've heard of people taking their entire pension and getting a life insurance policy on themselves to give to their spouse if they should die. Is this something my husband and I should look into? It seems pretty risky. It's not risky as long as you take all the factors into account and have everything in place before you make an irrevocable decision.
The first step is to determine what amount of money you both will need to meet expenses in retirement. Once this figure is determined, adjust the amount for one survivor.
Fixed expenses such as a mortgage, property taxes and homeowners insurance will probably remain the same unless the survivor is willing to downsize. Most grief therapists don't recommend any major changes immediately after a spouse or partner's death, so this dollar figure will probably not change for a few years.
Variable expenses such as car maintenance and replacement costs (assuming you currently have two cars and would sell one), utilities, food, etc., will probably decrease with one person instead of two. But don't forget to factor in inflation.
The second step is to determine your sources of income and any repercussions the death of one spouse will have on the sources of income. Don't forget to factor in reduced Social Security benefits if you will both be receiving a benefit in retirement.
At the first spouse's death, if that spouse's benefit was higher than the survivor's, the benefit of the surviving spouse will usually increase. If the surviving spouse's benefit was higher, it will not change. In either situation, the total benefit a retired couple is accustomed to receiving and helping with expenses will decrease upon the death of a spouse.
If a pension selection of less than 100 percent survivor is under consideration and the surviving spouse can easily meet expenses (including the unexpected) with other assets, then the reduced survivor pension options may be advisable. A pension selection of less than 100 percent survivor benefits may also make sense if adequate life insurance can be purchased for less than the after-tax increase in the single life pension option.
The following is a simple example:
Using your data, you will have $30 per month more by taking the single life pension option versus the 50 percent survivor option. Assuming a 15 percent federal and 7 percent state tax bracket, this will be an additional $23.40 a month.
If you wanted to make sure your husband received enough life insurance to generate the equivalent of a 50 percent joint and survivor pension, assuming he could get a 4 percent rate of return, you would need to purchase a life insurance policy with a $50,000 death benefit. The monthly cost of the policy would need to be less than $23.40 to make the purchase of a policy versus taking the 50 percent survivor pension worthwhile.
Other factors including health and life expectancies for you and your spouse should be taken into consideration.
If you decide to take a single life pension and protect your spouse financially by obtaining a life insurance policy on yourself, apply for the policy at least 2 months in advance of the date of your pension selection. Even though you have been quoted a premium that meets yourcriteria, you want to make sure the policy will be issued and at that premium.
I know of one couple that decided to take a single life pension and use a life insurance policy as an income replacement for the wife if he should die first. They thought he was in good health and signed the paperwork for the single pension while waiting for the life insurance policy to be issued. During the life insurance underwriting process, serious health issues were discovered and he was denied coverage.
Upon his death, his rather large pension will cease and the widow will be left to live on Social Security and an income stream from a small portfolio. Pension selections are irrevocable, so a meeting with a qualified adviser is recommended.
