Lump Sum, Single Life, or Joint-and-Survivor: A Pension Election With a Spouse Seven Years Younger
Priya, 62, is retiring from a regulated utility after 31 years and must choose within 60 days: a $410,000 lump sum, a single-life annuity of $2,350 a month, or a 100% joint-and-survivor annuity of $1,970 a month. Her husband Raj is 55, healthy, and keeps employer health coverage until 65. Priya was treated for Stage 2 breast cancer two years ago and is in remission; her oncologist calls the prognosis favorable, and her mother lived to 94. They have $850,000 in retirement accounts, a $300,000 mortgage at 3.1%, no long-term care insurance, and $40,000 in cash. Priya's Social Security at 67 is $2,600; Raj's is $2,900. The pension is PBGC-covered and has no COLA.
1. Compare the three elections and recommend one, showing the quantitative and qualitative basis.
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Annual payout per dollar of lump sum: single life $28,200 / $410,000 = 6.9%; 100% J&S $23,640 / $410,000 = 5.8%.
Two things stand out. First, 5.8% for a joint-life income covering a survivor seven years younger is cheap - a commercial annuity would price that age gap more harshly than a 16% reduction. Second, the plan is underwriting Priya at standard rates despite her cancer history, which is favorable to the couple and cannot be replicated in the retail market.
Qualitative checks:
- Credit risk is not the issue. The benefit is far below the PBGC maximum guarantee; the real risks are inflation (no COLA) and plan termination, not default.
- The lump sum buys no mortality credits and shifts investment, longevity, and behavioral risk onto two people, one of whom is 55 and may not retire for a decade.
- The 'pension max' workaround fails here. Taking the single life and buying term insurance on Priya to protect Raj requires underwriting she may not clear, or may clear only at rated, expensive terms.
Recommendation: 100% joint-and-survivor annuity. The lump sum would only be preferable if she were in poor health with no survivor concern, or if the implied rate were far below market - neither is true.
2. How does the election change the rest of the plan, and how should the $850,000 be invested?
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Start with the floor. Assume essentials are about $6,000 a month ($72,000). The J&S pension provides $23,640; once both claim Social Security, the floor is roughly $89,600 - comfortably above essentials. That changes the job description of the $850,000: it funds discretionary spending, long-term care, and legacy, not groceries. A floor that covers necessities is what allows a 60/40 or even higher equity allocation to be held through a deep drawdown without forced selling.
Two gaps the pension cannot fill:
- The pre-65/pre-70 years. Raj's salary and the $40,000 of cash carry the household; avoid drawing on the portfolio in the years when Priya is not yet collecting Social Security.
- Long-term care. There is no coverage, and Priya may be harder to insure now. Either ring-fence roughly $250,000–$300,000 of the portfolio for care or price a hybrid policy immediately, while she is still insurable.
Two things not to do: do not take the lump sum to retire the 3.1% mortgage (the after-tax cost of that debt is below any reasonable expected return, and it consumes the liquidity that covers the gaps), and do not buy an expensive VA or indexed annuity to 'replace' the pension income she already has.
3. Priya dies at 70. Walk through the survivor outcome under each election and explain what that reveals about the decision.
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- Single life: the pension stops. Raj, then 63, receives nothing from it, and his remaining income is his own Social Security and whatever the portfolio provides.
- J&S: Raj receives $1,970 a month for life. Starting at 63, that could run 25+ years - roughly $590,000 nominal, plus any future plan increases, with no investment risk.
- Lump sum: whatever remains, with all longevity and market risk transferred to Raj at the worst possible time to manage it.
The detail that decides the case: Raj's own Social Security ($2,900 at 67) exceeds Priya's ($2,600), so he will never collect a survivor benefit from her record. Social Security provides no spousal protection here. The pension survivor benefit is the couple's only hedge against Priya dying first - and her health history is precisely the reason to insure that outcome rather than bet against it.
A 16% reduction in her own income to buy a lifetime income for a spouse with a 25-year expected horizon and no other survivor income is not a close call. The one fact that would flip it is a materially shortened life expectancy for Priya combined with Raj having substantial independent guaranteed income; absent both, the J&S stands.