In previous blogs we covered PSERS Maximum Option and Option #1 in great detail. Be sure to see those older posts if you missed them! Now we turn our attention to PSERS option #2 and #3. These options are designed to provide your spouse with a survivors benefit upon the retiree’s death. Option #2 provides a 100% survivorship benefit and Option #3 provides a 50% survivorship benefit. The more benefits you want to provide, the greater the reduction in your pension. Or, as we say, the greater the cost of providing survivors benefits. If your spouse dies first, you continue to “pay” (in the form of a reduced benefit) for a benefit that nobody will receive. Kind of stinks, doesn’t it. And, if the retiree dies first, and COLA’s had been granted by the state legislature (which is unlikely given the state of pension plan funding in PA), your survivor does not receive an increase in their benefits. Also, remember, the greater the age difference between you and your spouse, the greater the reduction in your pension if you choose a survivorship option. Why? Because PSERS would likely have to pay out benefits to the survivor longer! That’s why it does not make sense to name children as survivor annuitants.
So, if you need to provide survivors benefits to someone because they don’t have their own pension or there are not enough investment assets, option #2 or #3 just might fit the bill. If you are in good health, you could also consider buying your own life insurance policy to provide your spouse with an equivalent benefit. But, usually life insurance carries a certain term of fifteen or twenty years and then it gets prohibitively expensive. Be careful!
The key to choosing any of the options is to solve for the need – either your own or with you and your spouse (or children). Understand how these option work BEFORE you go to your PSERS exit counselling meeting. You don’t want to choose an option without much thought and ultimately regret. Most teachers need professional guidance from a trusted financial advisor. Seek out a fee-only advisor who sits on your side of the table.
