As many of you know, prior to retiring, if you are in the FRS Pension Plan, you will need to decide what pension survivor option to choose. This decision is irrevocable at the time of retirement – or at the time of entering the DROP – and cannot be changed. There are four options:
1. Single Life Annuity: The benefit dies when the member dies.
2. 10-Year Certain Option: The benefit pays for a minimum of 10 years or the life of the member – the clock starts when you retire or the day you enter the DROP.
3. 100-percent Joint Survivor Spousal Option: The benefit pays until the death of both the member and his/her spouse.
4. 66-and-two-thirds Spousal Option: The benefit pays until either the member or his/her spouse dies; then it is reduced to 66-and-two-thirds of the original, reduced benefit amount.
Option 1 is the maximum pension that you earned throughout your career. Your pension is reduced if you select Options 2, 3 or 4 – the reduction is based on your age and your spouse’s age at the time of retirement. It reduces the amount of money you receive in the DROP, and for the rest of your life.
Historically, the cost of selecting Option 3 or Option 4 (a survivor option) has been too expensive for many members. Instead they have elected to purchase life insurance to maximize their pension. Now, the cost of selecting a Survivor Option with FRS has been reduced to the benefit of most members.
For example, a 55-year-old with a 50-year-old spouse would – based on 25 years of Special Risk Service and an Average Final Compensation (AFC) of $100,000 – receive:
Prior to Jan. 1, 2016:
- Option 1: $75,000
- Option 2: $73,461 (97.948 percent)
- Option 3: $59,540 (79.387 percent)
- Option 4: $65,163 (86.884 percent)
After Jan. 1, 2016:
- Option 1: $75,000
- Option 2: $74,077 (98.77 percent)
- Option 3: $65,182 (86.91 percent)
- Option 4: $69,982 (93.31 percent)
Difference (annual savings):
- Option 1: $0
- Option 2: +$616
- Option 3: +$5,642
- Option 4: +$4,819
As you can see, there is significant savings based on the recent changes. What does this mean for you? If you have begun preparing for retirement and life insurance is part of your plan, you may want to re-evaluate what is more cost effective and what will provide your family a greater benefit, keeping in mind Term Life Insurance policies expire, and every year your pension amount will rise with your Cost of Living Adjustment.
There are times where life insurance still will be beneficial – but because of the changes, everyone needs to sit down with their financial advisor to get updated figures and reevaluate what solution is best for their family. Take the time out of your busy schedule to put a plan together. Remember, you only get one chance to make the right decision!