I’M IN EXCELLENT health. I avoid overindulging on sugar and carbohydrates. I exercise every day. I hope to live well into my 90s, if not longer.
What if I don’t live nearly that long? From a financial perspective, it makes little difference if I pass away before I tap my retirement funds. The value of most of my accounts wouldn’t be affected by my premature demise. My husband would simply inherit my 403(b) and Roth IRA accounts.
My state pension, however, is a different beast. I became vested in the pension when I was in my 20s. It’s a lucrative benefit. The funds are guaranteed to earn a minimum 7% interest each year. Some retired employees end up receiving as much as 130% of their final salaries from their pension payouts.
My pension consists of two separate accounts. The employee account makes up about 40% of the overall value, while the employer account holds the balance of the funds.
My plan is to hold off taking any payout from my pension until I’m 70 years old, which is 14 years’ away. At that point, I’d be eligible to receive approximately $1,400 a month for the rest of my life. In lieu of a monthly payout, I could opt to take a lump sum benefit worth approximately $165,000. Those payouts are based on a complicated formula that includes the value of both the employee and employer accounts.
Here’s where things get tricky. What if I were to die before drawing any pension benefit? My husband would receive a survivor benefit. But as beneficiary, he’d be entitled to receive only those funds held in my employee account.
So how could I make the best of a situation that isn’t fun to contemplate? If I’m diagnosed with a terminal illness in the next 14 years, I’ll likely take a lump sum payment from my annuity. Doing so would guarantee that the full value of my pension would be passed along to my husband, instead of just the 40% employee portion.
Just a warning about pension inflation adjustments/COLA’s. I retired with a full pension from the State of New Jersey in 2010. Generally, COLA adjustments started 2 years after retirement. In 2011, then Governor Christie signed legislation suspending the COLA adjustments until the pension funds reached a certain level of funding. I believe approx. 80 % of being fully funded. After 12 years my gross pension amount remains the same. I’m fortunate to report that none of my other expenses have gone up in that time (sarcasm). So for those lucky enough to have pension COLA’s be aware that they can be suspended/taken away. I am certainly grateful for the pension I earned but wouldn’t mind having the COLA also.
That sounds like a really sweet deal – my pension pays about 40% of my final year’s salary. Do I gather that the monthly pay out is currently growing at 7%/year? Or is that only while you are working? And you will have a 2% inflation adjustment but no other growth when you start drawing on it?
It’s a ridiculously generous benefit. It would have been even better if I hadn’t lost half of it to my ex-husband.
The entire account balance (employee+employer) is growing at 7.2% a year. It used to be a minimum of 8%, but that was lowered a few years ago. Prior to the 8% minimum, the account grew at the actual rate of return. In the late 90’s, there was a year when we earned 28% interest. Needless to say, they’ve had to significantly revise the ‘rules’ of the pension since the state was going broke trying to fund it.
I became vested when I was 28 years old and it’s been earning at least 7% since then. Once I begin drawing it down, I will only be eligible to get the 2% inflation adjustment, no additional growth.
Even a two percent inflation adjustment is a rare beast, as I believe the majority of pensions (including mine) are fixed. If the Federal Reserve gets back to it’s target for inflation you will be golden
I didn’t realize most pensions were fixed. My husband also has a state pension (a different state than mine) and he also gets an annual COLA. It’s capped at 3%, but there’s a similar ‘carry-over’ provision for it so I suspect he’ll be getting 3% a year for quite awhile given the recent rates of inflation.
Congratulations – that is an amazing deal. And the longer you wait, the better the payout.
Thoughtful planning.
From your comments I would assume that when you eventually die your pension will pass, as you intend, to your husband if he survives you via the primary beneficiary designation you elected on your plan documents or perhaps by requirements of ERISA law. If neither the beneficiary or ERISA distributions directives applies then the provisions of your will or the intestate provisions of your resident state law would likely control the disposition of those assets.
Often people with children will name them as contingent beneficiaries when the spouse is the primary beneficiary. For those without children who desire to leave tax deferred assets ( also called income in respect to a decedent after your death) to a charity they support then the decision and action to name the charity as contingent beneficiary may result in significant income tax savings and funds going to the charitable beneficiary free of income taxes. Proper naming of beneficiaries may also make your eventual estate administration less work.
I have seen people who name their church (or another qualified charity the decedent supported ) as contingent beneficiary to avoid the benefit being subject to income tax at the estate (form 1041) level. Under current federal tax law if the qualified charity receives the deferred income distribution directly as a beneficiary the distribution would not be subject to income tax due to the church or qualified charity status as a qualified tax exempt entity. If the deferred tax money first goes to your estate it may be subject to income tax.
Hopefully you will live long and become a actuarial liability to your plan like Richard Quinn hopes to become.
Sounds like you’ve done a great job looking at all the options. Yeah, it is a bit grim to contemplate one’s demise, but certainly something we all need to do from time to time. The only comment I have to add is that when you do finalize your decision about whether to take the monthly pension or lump sum, be sure to consider that the monthly pension is most likely ERISA protected from creditors while your lump sum (depending on how it’s invested and your state of residence at the time) might well be less protected. This probably won’t be a major concern at that time, but it should be included on the pro’s & con’s analysis when making such a big decision.
Thanks for sharing Kristine. It’s (yet another) example of how complicated our financial lives can get as we age. There’s even more to ponder here than meets the eye: Are those monthly pension payments inflation-adjusted? Do you have the option of switching to a lump-sum payout once monthly payments start, or are you locked in at that point? What about a survivor benefit after monthly payments start?
And so on and so forth…I naively believed during many of my working years that our financial lives got simpler after we retired…right. From pensions, to retirement account allocations and withdrawals, to taxes, and more, things seem only to get more complicated, not less. I guess choices are a good thing, but dang, like Jonathan said a few days ago–many of these choices have to be made with flimsy and incomplete information, and are often irreversible. Yikes.
Complicated indeed! The ‘level’ of pension I’m in–which is the most lucrative level–does come with a cost of living adjustment. It’s capped at a maximum of 2% a year, but if the measured level of inflation is greater than 2%, any difference is carried over into future years. I think it’s safe to say that current retirees will be enjoying an annual 2% increase for the next several years.
I can’t switch between monthly payouts and/or a lump-sum payout once I receive any money. I plan on taking monthly payouts when I’m 70, but, like everything else in life, plans can change.
That is a nice option to be able to change your pension options should you become terminally ill. State pension apparently have a lot of perks.
Just to clarify–I can’t change my option once I receive a payout. So if I opt for monthly payments–and receive the first one–I can’t opt to get a lump sum at some point in the future.
Is the lump sum amount of $165,000 what you would get now or is that at age 70?
That would be the value when I’m 70.
That would buy you an immediate single life annuity of about $1,100 a month at today’s prices. Clearly the $1400 a month is a sweet deal … if you make it to 70.
My grandmother lived to be 101, so there’s at least a chance of me making it to 70.
Is your pension a cash balance plan by chance? It is a unique design.
Unique indeed. The state switched to a different pension plan after I was vested. The plan I’m under (“Tier 1”) is the most lucrative.
Making it even more unique was that I never contributed a penny to my ’employee’ account. Back in the 1970’s, the unions negotiated a deal with the state whereby the employer made ALL the contributions–to both the employee and employer accounts. So the state set aside approximately 15% of my salary each month (about 7% into my employee account and 8% into the employer account).