BIG IDEA #4 – Don’t Overlook Option #1
How the Public School Employee’s Retirement System can be understood through an examination of Option #1. First, it might be helpful to think of PSERS as a life insurance company. They provide benefits to it’s members based on factors such as the life expectancy, age, and the sex of each member. If married, they also take the same criteria into consideration for providing survivors benefits. If you remember that females live longer than males, you will begin to see patterns emerge in the projections. I’d imagine there are lots of actuaries on staff at PSERS crunching numbers just as there are at an insurance company.
The death benefit that you see on your retirement estimate represents the total of what you have contributed plus interest over your career plus what your school district and the state contributed on your behalf. Other than your contributions, you can’t pull out the present value of your account. You must select an income annuity option for yourself and if you want or need to provide survivors benefits, your spouse under option #2 or #3. Most people will not (should not) choose their children as a survivor annuitants under option #2 or #3 since your children have such a long life expectancy and retiree benefits would be reduced significantly. However, Option #1 offers an exception and perhaps an opportunity for some.
Under Option #1, you are able to name anyone as your beneficiary regardless of their age. For a reduced benefit from the maximum payout, your beneficiary will receive whatever is left of the present value of your account upon your death. After about 15-16 years, you have been paid pension benefits equal to the original death benefit and therefore your beneficiaries would receive nothing after that point. And your benefit will forever be reduced after that point for a benefit nobody will receive. But, if you choose option #1 and die shortly after retiring, your beneficiaries would receive the bulk of the present value of your retirement account. Your beneficiaries can elect to continue to receive your monthly benefit or rollover the balance to an IRA therefore deferring the tax.
So, if you are planning to retire and you are not in good health or have serious medical problems, option #1 just might be a good option to consider. A number of years ago we counselled a couple and the children ended up with a significant windfall due to making some very calculated decision. If you would like to know the details, be sure to let us know!
Click here if you would like to arrange a complimentary, no obligation DISCOVERY meeting with Chip Addis of Addis Hill to see if we can help you make smart retirement decisions.