Pension Option vs. Social Security Survivor Benefit

Transcription

1 Pension Option vs. Social Security Survivor Benefit Peter Thomann, EA, CFP Whether or not to select a pension option (100%, 50%, lump sum, etc.) is often a difficult decision for a recent retiree. There are many factors that should be considered during this decision making process: life expectancy, total assets, life insurance, cost of the option, etc. Prior to making the option decision, the retiree should be familiar with the Social Security survivor benefit. Many retirees are unaware of the value of maximizing Social Security in order for a spouse to receive a significant survivor benefit. The purpose of this paper is to compare a retiree who decides to select a pension option for a beneficiary with a retiree who does not select a pension option, but maximizes the Social Security survivor benefit. John & Mary Brown Example John Brown, age 60, recently retired and has decided to select a 50% pension option for his wife, Mary, age 60. The following table displays John s pension summary: John Brown Pension (50% pension option) Annual pension $50,000 Cost of option ($7,500) John s annual pension $42,500 Pension to Mary upon death of John $21,250

2 If we assume that John dies at age 80, the total cost of the option is $150,000 ($7,500 x 20 years). John will begin to receive COLA (cost of living adjustment) at age 65 based on the first $18,000 of his pension. Using a COLA factor of 2%, John s pension would be approximately $48,725 at age 80. After John s death, Mary will be eligible for ½ of the COLA on her pension of $21,250. If we assume that Mary dies at age 90, her pension at death would be $23,133 (based on a 1% COLA on her first $18,000 of her pension). At age 62, John has decided to begin reduced Social Security retirement benefits. To make the analysis simpler, assume Mary does not have her own Social Security retirement benefit, but claims her spousal benefit at age 62. The following table displays John and Mary s Social Security retirement benefit: John & Mary Brown Social Security Retirement Benefit SS Retirement Benefit at FRA* $2,200 monthly/$26,400 annually Cost of taking early benefit ($550) per month John s SS retirement benefit at age 62 $1,650 monthly/$19,800 annually Mary s SS spousal benefit at age 62 $770 monthly/$9,240 annually John s SS retirement benefit at age 70 $1,933 monthly/$23,199 Mary s SS spousal benefit at age 70 $902 monthly/$10,826 annually

3 SS survivor benefit to Mary at age 80 $2,357 monthly/$28,280 yearly Mary s SS survivor benefit at age 90 $2,873 monthly/$34,472 yearly Approximate SS benefits paid over both lives $979,133 *FRA= full retirement age The Social Security COLA benefit is calculated on the entire retirement benefit. Therefore, when John begins to receive COLA, it will be based on his retirement benefit of $19,800. Using a Social Security COLA factor of 2%, John s retirement benefit at age 80 would be approximately $28,280. Upon John s death, Mary would have a beginning survivor benefit of $28,280 and is eligible for COLA until her own death. If we assume that Mary dies at age 90, her survivor benefit at death would be $34,470 (based on a 2% COLA). Excluding any other assets Mary may have, her total annual income at age 80 will be $49,530 ($21,250 + $28,280) increasing to $57,605 ($23,133 + $34,472) at age 90. Mike & Carol Brady Example Mike Brady, age 60, recently retired and has decided to not select a pension option for his wife, Carol, age 60. The following table displays Mike s pension summary: Mike Brady Pension (no pension option) Annual pension $50,000 Pension to Carol upon death of Mike $0

4 If we assume that Mike dies at age 80, he would have been able to spend/invest $150,000 over the course of twenty years since he did not select a pension option. Mike will begin to receive COLA (cost of living adjustment) at age 65 based on the first $18,000 of his pension. Using a COLA factor of 2%, Mike s pension would be approximately $56,225 at age 80. After Mike s death, Carol will not receive any of Mike s pension. Mike has decided to delay receiving his Social Security retirement benefit until age 70 in order to provide Carol with a significant Social Security survivor benefit. Carol will claim her spousal benefit at age 66. The following table displays Mike and Carol s Social Security retirement benefit: Mike & Carol Brady Social Security Retirement Benefit SS Retirement Benefit at FRA $2,200 monthly/$26,400 annually Carol s spousal benefit at age 66 $1,191 monthly/$14,288 annually Mike s SS retirement benefit at age 70 $3,402 monthly/$40,830 annually Carol s spousal benefit at age 70 $1,289 monthly/$15,466 annually SS survivor benefit to Carol at age 80 $4,148 monthly/$49,772 yearly Carol s SS survivor benefit at age 90 $5,056 monthly/$60,671 yearly Approximate SS benefits paid over both lives $1,299,823

5 The Social Security COLA benefit is calculated on the entire retirement benefit. In addition to receiving delayed retirement credits, Mike also receives COLA even though he is not collecting his Social Security retirement benefit from age 62 to 70. Using a Social Security COLA factor of 2%, Mike s retirement benefit at age 70 would be approximately $40,830 annually increasing to $49,772 at age 80 (based on 2% COLA). Upon Mike s death, Carol would have a beginning survivor benefit of $49,772 and is eligible for COLA until her own death. If we assume that Carol dies at age 90, her survivor benefit at death would be $60,671 (based on a 2% COLA). Excluding any other assets Carol may have, her total annual income at age 80 will be $49,772 increasing to $60,671 at age 90. The following table compares the annual income (excluding other assets) of the Brown s with the Brady s at various ages: Brown vs Brady Annual Income Brown Brady Age 62 $ 5,961 monthly $71,540 yearly $4,166 monthly $50,000 annually Age 66 $6,191 monthly $74,294 yearly $5,387 monthly $64,648 yearly Age 70 $6,533 monthly $78,398 yearly $9,014 monthly $108,169 yearly

6 Age 80 $7,516 monthly $90,201 yearly $10,404 monthly $124,850 yearly The following table displays a summary of the Social Security spousal benefit and survivor benefit for Mary & Carol at various ages. Mary vs. Carol Mary Carol Spousal benefit at age 62 $770 monthly $9,240 yearly $0 Spousal benefit at age 66 $833 monthly $10,002 yearly $1,191 monthly $14,288 yearly Spousal benefit at age 70 $902 monthly $10,826 yearly $1,289 monthly $15,466 yearly Survivor benefit at age 80 $2,357 monthly $28,280 yearly $4,148 monthly $49,772 yearly

7 Survivor benefit at age 90 $2,873 monthly $34,472 yearly $5,056 monthly $60,671 yearly The decision of when and how to file for Social Security retirement benefits can significantly change the survivor benefit as shown in the examples. There are different Social Security claiming strategies an individual can utilize in order to maximize both the total amount of benefits paid and the survivor benefit. Disclaimer: This paper is not intended as Social Security planning. The determination of how Social Security affects an individual is unique and there are many factors to consider. Peter Thomann, EA, CFP, is the owner of Thomann Tax, Inc. Thomann Tax provides the following services: tax preparation, retirement planning, and Social Security planning. For more information visit: