Pension Election and Social Security Timing for a Retired Couple
Ken, 64, and Lisa, 62, are both retired from paid work but not yet claiming Social Security. Ken's pension offers either a $620,000 lump sum or a $3,400 per month joint-and-100% survivor annuity beginning now. Their portfolio is $1.10 million in a 60/40 allocation; $700,000 is in traditional IRAs and 401(k)s, $250,000 in taxable accounts, and $150,000 in Roth IRAs. Their annual spending need is $95,000 after tax. Ken's Social Security at full retirement age (67) is $2,900 per month; Lisa's at 67 is $1,900 per month. If Ken claims at 70, his benefit rises about 24% over his FRA amount; Lisa's at 70 rises about 24%. They have no long-term care insurance, are in good health, and have two adult children. They want to leave the surviving spouse financially secure and minimize the risk of running out of money. Their current withdrawal rate from the portfolio would be about 6% if they take the lump sum and delay Social Security.
1. Compare the pension lump sum and the joint-and-survivor annuity. What factors should drive the decision?
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Annuity math: $3,400 x 12 = $40,800 per year. $40,800 / $620,000 = 6.58% starting payout rate. Simple payback is 15.2 years, but with any positive return and inflation the true break-even is longer. For a healthy couple, a 100% joint-and-survivor annuity is longevity insurance: it cannot be outlived and protects the surviving spouse.
Risks: The annuity may have no cost-of-living adjustment. At 3% inflation, $40,800 loses about half its purchasing power in roughly 24 years. There is also plan-sponsor and possibly PBGC risk. The lump sum offers liquidity, estate value, and inflation-fighting investment potential, but it transfers longevity and sequence-of-returns risk to Ken and Lisa.
Judgment: A 4% withdrawal from $620,000 is only $24,800, well below the $40,800 annuity. If the pension plan is sound and the couple values survivor security, the annuity is a defensible core floor. If they take the lump sum, they should plan a lower initial withdrawal and keep a bond/cash ladder; they should not treat the 6.58% payout as a free lunch. Because the annuity has no COLA, delaying Social Security becomes even more important because Social Security is inflation-adjusted.
2. Evaluate Social Security claiming strategies and explain how to bridge the cash-flow gap.
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Delay the higher earner first. Ken's FRA benefit is $2,900 per month. At 70 it is about 24% higher, or $3,596 per month. Lisa's $1,900 at 67 would be about $2,356 at 70. The survivor keeps the larger of the two benefits, so delaying Ken to 70 is the strongest survivor protection.
Cash-flow bridge: If Ken delays to 70 and Lisa claims at 67, the household has the pension annuity of $40,800 plus Lisa's $22,800 from age 67 to 70, then Ken's higher benefit. If both delay to 70, they need a larger bridge from the portfolio, but they also lock in higher inflation-adjusted income for life.
Judgment: Ken should generally delay to 70 unless health or liquidity makes it impossible. Lisa can claim at 67 to reduce the portfolio draw, or also delay to 70 if the bridge is affordable. The bridge should be funded with a conservative cash/bond reserve, not by selling equities in a downturn. The couple should coordinate claiming with the pension choice: the annuity floor makes delaying Social Security easier, while a lump sum requires a larger reserve.
3. How should they address sequence-of-returns risk and the absence of long-term care insurance?
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Sequence risk: With a $95,000 spending need and a $1.1 million portfolio, the withdrawal rate is high before Social Security and the pension are fully online. A 20-30% market decline in the first few retirement years could permanently impair the portfolio. The plan should hold two to three years of net spending in cash and short-duration bonds and use the annuity and delayed Social Security as inflation-adjusted floors.
Stress test: Model a 25% equity decline in year one, 3% inflation, and a 30-year retirement. If the plan fails, fixes include lower initial spending, part-time income, a higher annuity allocation, or delaying retirement. Use guardrails: cut discretionary spending after a bad year rather than selling more equities.
Long-term care: No LTC insurance is a major gap. A single prolonged care event can cost more than the portfolio can absorb. They should compare a traditional LTC policy, a hybrid life/LTC product, and a self-funded reserve. If self-funding, earmark a distinct sleeve of at least several hundred thousand dollars and do not count it as retirement spending money.
Survivor security: Keep the 100% survivor annuity, delay Ken's Social Security, and document the plan so the surviving spouse knows which accounts fund which years.