We have provided the following hypothetical case study for you to use as a starting point when calculating your monthly benefits from employer and social security sources of retirement income.   This study has a participant (“Retiree”) of a DB Plan with a beneficiary (“Bene”) should the Retiree pass away.

This example assumes that the Retiree and Bene have done all of the preliminary work by contacting their employer and the social security administration for projected benefit information.   It also assumes they ran scenarios for different ages and selected 62 as to what is best for them.

The study doesn’t take into account “pop up” benefits, income leveling, any additional taxable or tax deferred savings, any retirement income from a plan for the Bene, life insurance or other sources of income which may be available.   Because there are so many different variations when determining what your retirement income will be, you may want to get expert advice prior to making any decisions regarding which benefits to choose. A calculation is done using an assumption that the Retiree passes away at age 70.  This is done to show the changes to income that a beneficiary could rely on after the Retirees death.

Therefore for this example, assume the following:

  • Retiree is age 62, Bene is age 60.
  • Retiree decides to collect pension and social security benefits now.2
  • Bene will earn a salary of $3,000.00 a month for the next two years, retire at age 62 and will also take social security at that time.

Retiree has determined that they need to select one of the following benefits from their employer:

  • Single Life Benefit: $5,000.00 / month;
  • Joint / Survivor (50 / 50): $4,750.00 / month;
  • Joint / Survivor (75 / 75): $4,500.00 / month;
  • Joint / Survivor (100 / 100): $4,250.00 / month.

Retiree and Bene will receive the following monthly social security benefits at age 62:

  • Retiree $2,250 (age 62)
  • Bene $1,550 (age 62)

Case Study Results

Based on this information, the following table is produced showing them where they would stand for each selection (including the death of the retiree at the age of 70). 

Obviously at first glance the best selection is to take the Single Life payout because it has a monthly income payment which is between approximately 3% and 9% higher.  Yet, the meaningful differential will occur should the retiree pass away first. In that case the amount to the beneficiary would drop substantially.  (See the - Monthly Income If Retiree Dies @ 70 Years Old Single Life - column).

In addition, you will also realize that there is an adjustment to the projected income after the Bene reaches age 62.  That is a result of the discontinuation of their salary which will be substituted for their social security benefit.   The social security benefit paid to the Bene will remain the same under any scenario as long as the Retiree continues to live. 

However should the Retiree pass away, the Bene will then receive the Retiree’s social security benefit if it is higher then what they were receiving prior to the Retiree’s death.   If, however, the Bene’s social security was higher than the Retiree’s, the death of the Retiree would not trigger an adjustment for the Bene. 

The most difficult part of this exercise is deciding which plan benefit would be best for you.  Many employees are considering retirement at a younger age today due to corporate downsizing or to do as much as possible with the remainder of their lives.  Despite the reason, in many instances, it is a good time to plan for a new chapter in your life.

Were you able to make additional contributions to a 401(k), to build taxable assets or to have another wage earner in the home?  If you did, then factoring in these additional resources might allow you to change your retirement dates, to consider deferring social security or the benefit you select in your participating DB Plan.  Remember, it is very important to realize that the benefit selected at retirement will be with you for the rest of your life.  Those emotional decisions look good today but could lead to unfavorable long-term consequences.

It is key to “run the numbers” yourself or hire a professional to do it before deciding which benefit to take.  Having an understanding of where you will stand during retirement should reduce the stress that goes along with making the proper selection.

Upcoming blog postings will discuss the concept of managing money in either a tax deferred or taxable account during the retirement years.  Many investors worry that they’ll run out of money and are afraid to confront this issue.  In a number of instances they let their emotions govern their actions and commit to the sales pitch they receive from the local annuity representative.  This is potentially a bad decision that many investors come to regret.

By presenting ideas that marry risk management and income distribution schedules we can help an investor to think about their long-term retirement situation in a much different light.  It might even be contrary to what is being professed by other professionals and the financial media.

Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.