In less than six years, Georgina and I will have to decide:
– Should I start taking my pension at age 55, or wait?
– If yes, should I take $916 a month for the rest of my life (that’s the company estimate), or $852 a month so Georgina is sure to get half of that, or $426 a month, if I die before she does?
That question, in one form of another, is typical of many I get in the mail. By writing about our case, I hope I can help you make the decision that makes the most sense for you.
The first choice is pretty easy for us: The sooner I start taking my pension, the better.
If I wait until age 62 to collect full benefits (my company offers them at 62 if you worked at least 10 years), I will get 50 percent more. But seven years is more than I care to wait to make 50 percent on our money-it works out to just about 6 percent a year, compounded.
Besides, planning to quit full-time work at 55 as I do, the monthly pension will be a steady stream of income that would let our tax-deferred accounts continue to grow untouched until we can take our money out without penalties at age 59 1/2.
Your choice on how soon you start drawing your pension would depend on whether you need, or can use, the money at an early age; the impact on your tax bill; and how much more you would get by waiting to collect.
The other decision, how large a pension to take, is a bit more complicated.
A federal law, the Retirement Equity Act of 1984, says that unless your spouse consents in writing to do otherwise, you must elect what is called the “joint and survivor 50 percent option.” That means if you die first, your spouse will keep collecting half your pension until he or she dies.
If you elect the single-life pension, and you drop dead the day after, your spouse won’t get one cent.
That’s why the single-life method offers the highest monthly payment, or $916 in my case. The joint and survivor 50 percent option pays less-$64 a month less in my case-because the company risks having to keep up the payments longer, until both Georgina and I die.
You may not have thought about it that way, but with the joint and survivor 50 percent option you are in fact buying life insurance and paying the premiums with the difference between the monthly pension payments.
Factors to consider
Maybe you already have life insurance, and were thinking of dropping it because your children are grown, your mortgage is paid off and you already have a hefty nest egg. Consider keeping it, however, to allow you to opt for the higher monthly pension. Just make sure you know how much the policy is costing you for the actual insurance, aside from any buildup in cash value.
You also have to consider your age and that of your spouse, as well as your health. If your spouse is much older, or very ill, and likely to die first, and you have other sources of income, you may want to take the highest pension payment now while you both can enjoy it.
Another key factor to consider is how much life insurance you need to replace the monthly pension.
Let’s do some figuring. The $426 a month Georgina would get under the joint and survivor 50 percent option amounts to $5,112 a year. If you can make 8 percent on your money-and 30-year Treasury bonds were paying that as I wrote this-you need about $64,000 in a lump sum to generate the $5,112 a year.
One advantage of a life insurance policy is the payout is tax-free to the beneficiary. And not only can you invest the money to generate the monthly income, but the whole amount is there in case of an emergency, or to pass on to your heirs when you die. On the other hand, when pension payments stop, they stop, and there is no money left.
Most companies, including mine, offer other payment options, including a joint and survivor 100 percent option (meaning the spouse keeps getting the full monthly payment) and a “period certain” payment, meaning monthly payments are guaranteed to continue for at least 5, 10, or whatever number of years are chosen. Of course, the size of the monthly payment always goes down the more guarantees you want.
Our plan requires a 90-day waiting period between the time we make a payout choice and the time payments begin.
So what will be our choice? Well, we still have more than five years to decide.
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Humberto Cruz welcomes questions and comments from readers. Although he cannot respond to each one individually, he will answer those of general interest in his column. Write to him in care of the Orlando Sentinel, P.O. Box 119, Orlando, Fla., 32802-0119.
