The PSERS pension option decision should not be taken lightly. Your selections are permanent and can’t be reversed if your life circumstances change in the years to come. So, choosing the maximum pension can provide you with you with the greatest flexibility in that you will always get the most out of the retirement system, as long as you can take care of your spouse using other strategies. We’d like to point out a few things that could make you rethink your decision:
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- The maximum option pays you the most of any of the option choices since it provides a benefit to you the retiree and nobody else. Most who are single choose the maximum option – pretty straight forward.
- If you need to provide survivors benefits to your spouse, you can do so by accepting a reduction in your payout. The more benefits you want to provide the greater the reduction in your pension. And, the greater your differences in age, the greater the reduction.
- If you OR your spouse have a prior medical history, seek immediate financial advice! Why? Let’s say that you selected option #3 (50% joint and survivor option) and your spouse dies first – what happens? Unfortunately you are stuck with a lower payout (compared to the maximum) for LIFE even though nobody will ever receive a benefit from your account. That could add up to be quite a sum of money. For example, let’s say that you reduction in pension income is $500/mo to provide your spouse with a benefit if you die first. If your spouse dies after year ten you have “spent” $60,000 in the form of a reduced benefit, and you will pay out an additional $60,000 (in reduced benefits) if you live another ten years! $120,000 is a lot of money to “spend” for a benefit that nobody will receive.
- If you own life insurance or are healthy enough to qualify for a new policy, you might be able to choose the maximum option and use the death proceeds to provide for your spouse. you can cancel the policy or change the beneficiaries and you are still receiving the maximum payout.
- Your spouse may have his or her own pension. Or, you may have enough saved in retirement and other investment accounts to provide for the surviving spouse! Why take a reduced benefit if they are sufficiently protected / provided for?
Our goal in the planning process is to try to get as many retirees to choose the maximum option and provide for their spouse in other ways! But, if the other ways are limited or not possible at all there might not be anything you can do but choose a survivorship option.
Bottom line… Seek out the help of a fee-only fiduciary that can help you make smart retirement decisions before you sign on the dotted line!
Next week: Don’t overlook option #1!
Chip Addis
CAddis@AddisHill.com
