Need Help. Should Client Take Pension or Lump Sum and Invest?

[jacobtn]

I need a little direction, my father in law retired from AT&T and has been receiving a pension for 25 years. He is 75 and in perfect health, his wife is 70 and also healthy. They live in NC.

He receives 1179 per month but it has no survivorship (its a traditional pension which ends when he dies).

The company is offering him and 45,000 retirees 4 permanent choices in Sept.

1. Continue as is, but payments cease at his death (what he chose originally, not a good choice in my opinion)

2. lump sum option for the first time, in which in his case would result in a 134,000 1 time IRA distribution.

3. Joint and 50% survivor which he would only get 968.58, but she would get a survivorship payment of 484.29. If she dies first he would get bumped up to the old higher payment of 1179.

4. Joint and 75% survivor which would be 889.21 to him, 666.21 to her. Again if she dies first he would get bumped up to 1179.

I usually recommend clients take control of their IRA and roll pensions out to IRAs, and draw payments off of it so they have an inheritable asset (and they control it). This one is no different except it's the in laws which of course has its own set of challenges.

They are only bringing home 875 of the 1179 now because 100 in income tax and 200 in health insurance is being withheld. They would like to continue to bring home around 800 per month but I'm not seeing how an annuity income rider can do this on their 134k. I can sell them a much lower health insurance (about half their cost) so that would help some.

Suggestions?

 

[Glen Shelton]

I need a little direction, my father in law retired from AT&T and has been receiving a pension for 25 years. He is 75 and in perfect health, his wife is 70 and also healthy. They live in NC. He receives 1179 per month but it has no survivorship (its a traditional pension which ends when he dies). The company is offering him and 45,000 retirees 4 permanent choices in Sept. 1. Continue as is, but payments cease at his death (what he chose originally, not a good choice in my opinion) 2. lump sum option for the first time, in which in his case would result in a 134,000 1 time IRA distribution. 3. Joint and 50% survivor which he would only get 968.58, but she would get a survivorship payment of 484.29. If she dies first he would get bumped up to the old higher payment of 1179. 4. Joint and 75% survivor which would be 889.21 to him, 666.21 to her. Again if she dies first he would get bumped up to 1179. I usually recommend clients take control of their IRA and roll pensions out to IRAs, and draw payments off of it so they have an inheritable asset (and they control it). This one is no different except it's the in laws which of course has its own set of challenges. They are only bringing home 875 of the 1179 now because 100 in income tax and 200 in health insurance is being withheld. They would like to continue to bring home around 800 per month but I'm not seeing how an annuity income rider can do this on their 134k. I can sell them a much lower health insurance (about half their cost) so that would help some. Suggestions?

I would say take the lump sum pay out!

They would have to live for another 9.5 Years to surpass 134K. Maybe they will, Maybe they won't but I would take the lump sum.

 

[SanDiego619]

I need a little direction, my father in law retired from AT&T and has been receiving a pension for 25 years. He is 75 and in perfect health, his wife is 70 and also healthy. They live in NC.

He receives 1179 per month but it has no survivorship (its a traditional pension which ends when he dies).

The company is offering him and 45,000 retirees 4 permanent choices in Sept.

1. Continue as is, but payments cease at his death (what he chose originally, not a good choice in my opinion)

2. lump sum option for the first time, in which in his case would result in a 134,000 1 time IRA distribution.

3. Joint and 50% survivor which he would only get 968.58, but she would get a survivorship payment of 484.29. If she dies first he would get bumped up to the old higher payment of 1179.

4. Joint and 75% survivor which would be 889.21 to him, 666.21 to her. Again if she dies first he would get bumped up to 1179.

I usually recommend clients take control of their IRA and roll pensions out to IRAs, and draw payments off of it so they have an inheritable asset (and they control it). This one is no different except it's the in laws which of course has its own set of challenges.

They are only bringing home 875 of the 1179 now because 100 in income tax and 200 in health insurance is being withheld. They would like to continue to bring home around 800 per month but I'm not seeing how an annuity income rider can do this on their 134k. I can sell them a much lower health insurance (about half their cost) so that would help some.

Suggestions?

If they need that income amount they need that income amount. Even SPIAs can't touch that payment let alone an FIA with a rider. All I would consider doing is switching to maybe option 3 so the wife is left with something.

Edit: To clarify SPIA on just his life would be about $100-120 less a month. He still has no control over the money. And the joint with reduction options seem even farther away

 

[DHK]

How much life insurance can he buy for $379/month? ($1,179 - $800 = $379)

Make sure it's a permanent kind of policy and use THAT for survivor needs at death.

Keep the pension as is, unless you can find something that guarantees a joint-life payout greater than 14%... which you won't find.

$134,000 / $9,600 = 13.95% distribution rate for single life.

$9,600 = $800 x 12 months ($800 being the minimum income goal you're looking for)

Don't forget that social security benefits are affected upon the death of the 1st spouse. The surviving spouse receives the higher of the two payments, but not both.

I'd look into a life insurance strategy, if possible, over trying to rearrange their pension money.

 

[scagnt83]

If he is insurable, and especially if he is still fairly healthy, I would second considering the life insurance strategy.
For $379/m he could get around $100k in GUL.
If he passed in 10 years she could get around $700/m using a SPIA. And that is at todays historically low interest rates. It would likely be more than that in 10 years. Basically, this method would allow her to keep the same or close to the same income that they would receive for him with Option 4. But while he is living they would receive the current payment that they are used to.

If he is not insurable then I would go with Option 4.

There is no way to make the lump sum of $134k produce the income they could receive from the other 3 options. Especially to guarantee it for the rest of their lives.

 

[cowgoesMoO]

Pension maximization through life. It's the smartest choice for the client and you get a commish. Win win.

Forget the single pay out, don't let the commission of an annuity get in the way of the best interests of the client. Keep in mind how much of that 134 would be taxable.

If he is uninsurable, option 3 or 4 would probably be best

 

[jacobtn]

Just found out he also had a free life death benefit which equals one year salary. I want to find out what this is but it would likely be 50-60k at least.

If he takes the lump sum he would lose this benefit, and instead would receive an additional 14k added to his lump sum. So instead of 1179 per month and a 50k death benefit he would have roughly 150k.

The more I look at this the more i think he should keep the pension, as long as it is insured somehow and the company can't bankrupt and cost him the pension later if it's underfunded.

I do think the life insurance GUL option mentioned makes sense. He does have a 50k NA custom guarantee I wrote him a few years ago so he has around 100k now total.

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If he is insurable, and especially if he is still fairly healthy, I would second considering the life insurance strategy.
For $379/m he could get around $100k in GUL.
If he passed in 10 years she could get around $700/m using a SPIA. And that is at todays historically low interest rates. It would likely be more than that in 10 years. Basically, this method would allow her to keep the same or close to the same income that they would receive for him with Option 4. But while he is living they would receive the current payment that they are used to.

If he is not insurable then I would go with Option 4.

There is no way to make the lump sum of $134k produce the income they could receive from the other 3 options. Especially to guarantee it for the rest of their lives.

Thanks for your response (and to the others as well).

If he is paying 379 mth for the life policy in effect he is netting 800 per month. What advantage do you see using this option over the survivorship payout, since the insurance premiums would effectively cause their net income to be about the same?

 

[Glen Shelton]

The more I look at this the more i think he should keep the pension, as long as it is insured somehow and the company can't bankrupt and cost him the pension later

That would be my biggest concern in this scenario. I feel like I see a headline every other week of a pension nearing bankruptcy. But if it's guaranteed and insured for life I guess it's nothing to worry about.

 

[scagnt83]

Thanks for your response (and to the others as well).

If he is paying 379 mth for the life policy in effect he is netting 800 per month. What advantage do you see using this option over the survivorship payout, since the insurance premiums would effectively cause their net income to be about the same?

First, I would check on that existing GUL to see what it is at. Order an inforce illustration and make sure that the DB does not reduce in the future as sometimes happens with GULs that have increasing DBs. But if it is at $100k and will stay there, then that helps the Pension Max scenario (life insurance) even more.


The advantage is that in the future that $100k will likely create a higher SPIA income than just $700/m for the wife. Interest rates are historically low right now, just 5 or 6 years ago it would have yielded a higher monthly income. So it is likely that the same will be true in the next 5 to 10 years, annuity rates are already starting to rise.

But if you can take $50k (half) of the current GUL, and add on another $50k with a new GUL, then he is only paying $190/m.

That leaves him with $989/m in current income.
Then if he dies the wife gets $700+ per month in income.
Basically, it will most likely create a higher income for both vs. Option 4. (considering the existing policy, if you cant include that then it will just create a higher income for her)

A few hundred might not be worth the trouble to them, idk. It just depends on their needs.