How do we choose a pension option?
My husband, 59, is retired and we need to choose one of several options from his union pension: straight life; life with 5,10, or 15 yr guarantees; joint with 60%,67%,75%, or 100% survivor and then there are the options with Canada Pension supplement whereby we get ~$500/mo more now and ~$260/mo less pension after 65. We also have life insurance: $200G on him; $100G on me. We also have some investment income and I will likely continue to work part time for at least the next 3 yrs. How do we choose which pension option to go with?
Your husband's employer should have provided sessions to help in this decision. They are probably still available to him, and will provide far more information than we on this site could -- there are a huge number of possibilities available to you, and you choice will depend on many more factors than we could consider.
Please contact your husband's pension plan, and see what info they can offer to support you.
There are a ton of variables involved that you and your husband will need to talk about, including (but not limited to):
Originally Posted by susan52
1) His health and longevity - how likely is he to die in the next 15 years? Don't just look at health issues - look at the possibility of accidents (does he drive a lot? Skydive for fun? etc)
2) How much money do you need to live on? If he dies and most of his pension stops at his death, would you still have enough income? To figure this out you'll need to take a good look at your current and projected expenses.
3) When will you need the money the most? If you will be doing more travelling in the next few years, you might want to take the extra $500 and give up the income later on.
4) What is your risk tolerance? Some of the options reduce the risk of losing the pension, in exchange for getting a smaller income.
Just some things to think about. As DAvid mentions, the employer should have some info sessions on pensions that should assist the two of you in making the decisions.
What kind of pension do you have? If you are going to mainly depend on your husband's pension in retirement, be sure to sign up for a joint pension. Last thing you want to happen is your husband passing away early in retirement and you left with nothing. Even with a guaranteed period payout, after the 5 or 10 years you are stuck with nothing.
Thank you. You have definitely raised some important items to consider. Yes, we'd like to do some limited travelling. I will only ever receive a small pension which is too small to ever support me. I had been thinking that the life insurance would be enough but perhaps not. Our ace in the hole are two pieces of real estate we own but in this market .... Unfortunately, there seems to only be the most limited info available from my husband's pension plan - ie. no seminars and only some phone/email support.
My understanding is that employers are increasingly withdrawing any "support" in choosing pension options due to (perceived or actual) liability concerns. I understand that unions may step in, but that this practice is by no means widespread.
The issues you are raising are the kinds of things that fee-for-service financial planners deal with in developing a financial plan. Is this something you would like to consider? You can find a list of fee-for-service planners at the Canadian Business forums and I can dig up a link if you like.
The reason I raise this is that you have listed a couple of financial concerns and questions beyond the pension option - life insurance and investments. The people I know who do fee-for-service financial planning (and full disclaimer: I do this, too, but am in NO WAY intending to shill here) would take all of these factors into account in modelling some financial futures for you. The intention of getting a financial plan is to provide some clarity on the financial side, so you can deal with the emotional parts of the equation on their own, not tangled up with "unknown unknowns."
Pension + Government Benefits is your lifetime base
Your pension option decision is going to be affected by many things. Tax planning will be critical. I have a lot of experience with pensions and am currently semi-retired. I focused my own early retirement decisions on maximizing after tax income, before and after age 65, by taking advantage of things like pension splitting. Except in extreme circumstances (e.g. one of you is known to have a very, very short life expectancy or you have enough funds that the surviving spouse doesn't need the pension) a spousal survivor pension gives both of you a predictable base when combined with the Canada Pension and OAS. If the pension is indexed to inflation the survivor option provides even more protection. Apply for CPP as soon as possible and use tax planning, as well as cash flow needs, to decide whether to take the extra amount now. There are many other factors that should be discussed with an advisor but my focus (I planned my own) was on using my pension, CPP and OAS as our lifetime base. All 3 provide income streams for life.
As others have suggested, there are so many variables you should probably consult a financial planner for advice. But some of-the cuff thoughts:
Originally Posted by susan52
You have indicated you will have very little pension of your own.
a) So you should probably be looking at one of the joint survivor options. The percentage you need requires an analysis of all the likely income streams for each survivor.
b) life with 5,10, or 15 yr guarantees will reduce your pension payments to pay for the guarantee. So long as you have a survivor benefit on the pension, why do you need the guarantee? You have life insurance and other investments to cover the needs of your estate(s), and even pass something to your beneficiaries if you both die in the same accident. (Unless you are still heavily mortgaged?)
c) The CPP supplement needs further explanation. What is the hidden cost to exercising this option? You need to look at your cash flow needs to decide on this.
d) Is the insurance paid-up, declining term, and/or are you continuing to pay premiums for it? Most people do not need insurance after retirement, other than for estate planning reasons.
Last edited by OhGreatGuru; 2009-07-17 at 03:45 PM.
Reason: Revised part of (a). 100% to survivor may make sense in many cases.
I would say:
1) Get rid of the insurance. No surviving partner will suffer financially upon the death of the other, as long as you make the correct pension choice.
2) Forget the guarantee options for the annuities. You did not mention any dependents or any necessity to leave a legacy so who cares if your 'investment' in the annuity dies with you? You will be dead. If you want to leave something, save it up from the annuity payments.
3) You have to consider outliving your husband, so forget the straight life annuity without joint survivorship. You will receive less monthly income with joint survivorship, but both of you are covered for life.
4)That leaves you with only a choice between the survivorship % levels. Only you can determine how much less it will cost you to live after he dies. Remember that he will not be around to take care of you through any illness. You will have to pay for that help. I would choose 100%. But that is personal.