For teachers in New York, one of the most lucrative benefits of your retirement strategy is your pension election options. With pension plans dwindling across most of the country, you have the unique opportunity to take part in this great benefit.
But it can be difficult to navigate the options you have. Sometimes I’m sure that looking at your pension plan can feel like a matrix of numbers, black ink swirling around the page making your head hurt and eyes blur until you want to give up.
I want to help you make sense of the options you have so that you can walk into retirement empowered and confident that you have made the right election options for you and your family.
Ready to get started? Let’s dive on in.
The Payout Options
Pension plans are unique animals and they come with a specific set of options for you to get your money. Most come in the form of annuities which are monthly payments that extend over a certain period of time.
Below, I have outlined the annuity options available to you.
A single life annuity is one of the most enticing options on paper— it provides set monthly payments for the rest of your life at the highest monthly amount. But as teachers, you know that just because something looks good on paper doesn’t mean it’s as spectacular in practice.
Since this option provides the highest monthly payout, I see many people instantly gravitate toward this payout plan. But it is important to remember that the single life payout applies only to you. The payments will continue for the rest of your life but they end as soon as you pass away. This could leave cash flow issues for your spouse or dependents.
Take the example of Lila and Luke.
If Lila elects for a single life annuity and after 5 years passes away, Luke will not receive any spousal benefits. If Luke has his own pension plan then he would be covered, but if not it could present additional complications if this scenario was not properly vetted while both are alive.
Keep in mind, however, that just because both spouses have a pension plan doesn’t mean that you don’t necessarily need spousal benefits in your pension election options. Make sure to take a critical look at your budget and future cash flow planning before making a decision.
One of the most important aspects of determining if the single life option is right for you is to assess your streams of retirement income and decide which option makes the most sense, for the life you want to live in retirement. Yes, the single life option will provide the most monthly income, however, it could also create significant downside for a spouse or dependent if that income is no longer available.
Joint and Survivor
Most married couples gravitate toward joint and survivor options. These plans often come in three forms: 50%, 75% or 100%. Your choice will ultimately determine the amount of money your spouse will receive if you pass away.
Let’s bring Lila and Luke back for this description. Lila’s hypothetical monthly payouts for the joint and survivor options look like this:
Lila and Luke have decided that a joint annuity plan makes the most sense for them. If Lila selects the 50% option she would receive $69,150 a year for the rest of her life, and once she passes away Luke would receive $34,570 a year for the remainder of his life.
But, if Lila chooses the 100% Joint and Survivor option she would get $67,040 per year and that same payment amount would extend to Luke upon her passing. While the payment is lower in this scenario, it does offer 100% of the benefit to the widowed spouse.
Even though the monthly payouts are a bit lower, the joint and survivor options provide income protection for both spouses throughout their life.
Period Certain Options
Period certain options are annuity plans that have a built-in guaranteed payout for a set number of years. This option can also be combined with the single life, the most common being single life annuity with 10 years.
In the case of Lila and Luke, if Lila elects the single life with a 10 year period certain option the payments would be made for a minimum of ten years and continue as long as Lila is alive. If she passes away 5 years into the 10-year plan, Luke would receive the full payment amount for the remainder of the period term, in this case, 5 years. But if Lila lives for 20 years, that same payment amount will be made to her throughout those 20 years.
Pop Up Option
Basically the Pop Up Option has a benefit lower than the single life max, however, if the beneficiary dies before the insured, then the pension will “pop up’ to the single life max. If the insured dies before the beneficiary, then the payouts remain the same for the life of the beneficiary.
Front and Center
So, with all of these payout options and the pros and cons that come along with each which route should you take?
The answer to that question lies in your financial goals.
- What goals mean the most to you in your retired life?
- How will your pension help you reach those goals?
- How does your pension factor into your estate plan?
The answers you come up with will help inform your decision and help you make the choice that honors your values. When you use your finances as a tool to help you reach your goals, you are setting yourself up to find true happiness because you are investing your time and resources in the things that matter most to you.
I know that understanding your pension plan can be difficult, and I would love to work with you to help you choose the best option for you to live the happiest retirement possible.