Q. My wife and I are both around 60 years of age. Ive received my final severance package and find the choices a bit overwhelming. My wife wants to take the 100 percent joint and survivor option, and Im leaning toward the single pension with the refund option. This gives us both the maximum payment and leaves her with the remaining amount if I should die early. We met with an investment broker, and, of course, his suggestion is to take the lump sum and invest the money with him. Is there a logical way to approach this decision? I know once its made it is irrevocable.
I have enclosed a copy of my severance packet.
You need to look at your pension in conjunction with other retirement matters: when to begin Social Security, available income-producing assets, debts, family obligations and future financial needs are a few of the issues to be reviewed. Find an objective adviser to help guide you through your numerous pension payment options. This could be either a tax professional or fee-only advisers that have a fiduciary duty to act in their clients behalf. Unfortunately, these major decisions require several assumptions over which you dont have total control.
Your best guess
The first major assumption is the life expectancy for you and your wife. We can all get hit by a bus tomorrow, but for planning purposes, try to predict a reasonable life span for yourselves. Family history, general health, eating habits, alcohol and tobacco use, weight, usage of seat belts, amount of car and air travel, are some of the factors in determining life expectancy.
There are many of these calculators on the Internet ranging from quick five-question surveys to very detailed time-consuming but more accurate surveys. Based solely on gender, the average life expectancy for a 60-year-old male is 83, for a 60-year-old female, its 85. There is a 50 percent chance that death will occur from natural causes between the ages of 75 and 91.
The longer you live, the more valuable the pension options are versus the lump sum. If you live a long time and you either survive your wife or you both die within a short period of time, the single life pension will provide the greatest benefit.
The refund option provides some protection, but based on the information packet you provided, if you take the single life pension with the refund option and live for 15 years and then die, there is nothing left to refund and your surviving spouse would receive nothing. The 100 percent joint and survivor option is the safest for your wife, but a lot of money is lost if at least one of you doesnt live beyond the average life expectancy age.
The second major assumption is the rate of return you could achieve with the lump sum. You would need a 3.97 percent rate of return to equal 300 monthly payments (age 85) under the 100 percent joint and survivor option and a 4.83 percent rate of return to equal 360 monthly payments (age 90).
If you think you can achieve this rate of return and dont think you will live well beyond 85 or 90, the lump sum is a good option. Once the lump sum amount is rolled to an IRA, distributions can be made as often as youd like.
Unlike the pension, the amounts can be reduced or increased as necessary to meet your needs. Once age 70 ½, you will need to abide by the required minimum distribution rules. Once a surviving spouse dies, any remaining funds can be left to heirs or a charity of your choice rather than reverting to the pension annuity company.
Assuming you can achieve or exceed the equivalent rate of return, if you and/or your spouse are spend thrifts, the lump sum option may be too tempting. Since you are able to access the money you could end up spending more than the equivalent pension payments and find yourselves running out of money much too soon.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, N.C. 27624