The Honeywell pension plan is one of many benefits available to Honeywell employees such as the 401k, insurance, stock options, deferred compensation plan, and other options. One important, yet little known, benefit available for many Honeywell retirees is the income leveling option. In this article we’ll explain what the Honeywell Pension Plan leveling option is and we’ll give some examples of how Honeywell retirees can use it to their advantage.
What is income leveling?
Typically, a pension benefit pays the retiree a fixed amount for life or the life of the retiree and/or their spouse (for a reduced amount).
Logical, simple, easy. Send in the paperwork and that’s that. Sound good?
But, actually you are potentially depriving yourself of a huge opportunity. Especially if you retire early.
Honeywell retirees are very fortunate that the Honeywell Pension Plan allows them to do something called “income leveling.” This basically allows you to receive a larger monthly pension benefit for a fixed amount of years and is reduced when you reach a pre-determined age, generally full retirement age for social security purposes (e.g. 66 years old). You gain the flexibility of allowing your pension benefit to be higher now and allow your social security benefit to grow!. In many cases, this can be a more optimal strategy than simply choosing a standard “life annuity.”
Income leveling examples
Let me show you an example of how income leveling can be beneficial.
Bill, a 62 year old married man, can take a 100% joint and survivor annuity at retirement at $2,000 per month. This pays him and his spouse Sylvia, age 58, $2,000 per month for the rest of their joint lives. Bill and Sylvia have retirement savings of $1,000,0000.
Here’s what the monthly family income picture looks like for Bill and Sylvia:
Scenario #1 – no income leveling
Pension benefit $2,000
Social security for Bill $1,500
Cash flow from retirement savings $3,000
Total income $6,500
Ideally, Bill would like to delay social security to allow it to grow but because the pension and savings don’t cover Bill and Sylvia’s living needs, Bill feels he needs to take social security early so he can stay afloat financially.
Here’s an interesting alternative they may want to consider.
There is also a leveling option which pays $3,200 per month until Bill reaches age 66 and then is reduced to $1,000 per month. The assumption is that Bill (and Sylvia) can wait until social security will kick in and be able to retire early with more money during the early years of retirement.
Here’s how the leveling option would make their family income picture look until age 66:
Scenario #2-Larger upfront pension and larger withdrawals from retirement savings
Pension benefit $3,200
Social security $0
Cash flow from retirement savings $4,300
Total income $6,500
In this scenario, Bill and Sylvia are temporarily increasing their savings withdrawals by $1,300 per month but are able to have the same monthly cash flow and delay starting social security.
When Bill reaches age 66 he’s at full retirement age and can start social security with full benefits as his Honeywell pension is reduced. The advantage is that now his social security benefit is a lot higher because he delayed taking it until he reached full retirement age.
It’s important to realize that the pension benefit does not increase for a cost of living adjustment (COLA). Not only is his social security benefit now higher, he will receive a COLA over time.
Now at age 66 under the leveling option, his Honeywell pension benefit is reduce to $1,000 per month.
Pension benefit $1,000
Sylvia social security benefit $800
Social security for Bill $2,000
Cash flow from retirement savings $2,700
Total income $6,500
This may work well for Bill and Sylvia because:
- Their social security benefits will grow adjusted for inflation (while their Honeywell pension benefits will not. In fact, if inflation averages 3% per year, Bill’s $2,000 pension will be only worth $1,200 per month on a real basis when he is 80). They have strategically positioned their social security to be larger for life and also adjusted for inflation.
- Drawing a larger pension amount upfront and taking larger initial cash withdrawals from savings allows them to maintain their current standard of living until social security benefits start for both Bill and Sylvia.
- They will have more flexibility. Depending on how their investments perform they may actually want to consider delaying social security further into the future to receive a higher benefit.
This strategy can be a compelling option for an early retiree who desires to take social security later in life.
Unfortunately, many retirees would opt for Scenario One because they’ve made the decision without the understanding that taking the bigger pension payout upfront might not have worked out the best for them in the long term given what options they had.
The takeaway is that any pension decision should be well thought out and take into account the entirety of your retirement savings and social security benefits.
Important: This example is hypothetical and not the circumstances of any specific current or retired Honeywell employee. Providus Advisors is not affiliated with Honeywell.