Option A, a 100 percent joint and survivor benefit, provides a lifetime monthly payment to you. One final point to consider is life expectancy. Under this annuity, you receive payments for a preset number of years at a minimum, but they continue as long as you live. When you retire and you are vested in your employer defined-benefit pension plan, you will have to choose how you want to receive your pension benefits. Upon her death, her spouse would receive half that amount—$780 per month—as long as he lives. Complex calculations are performed by actuaries to determine how much can be contributed to the defined benefit plan each year using a participant’s age, years until retirement, balance in the plan expected investment return, etc. The larger the difference in age between two individuals, the longer the life expectancy of their joint lives. As one may suspect, there are a multitude of iterations that can be performed on this analysis, each with slightly different results. This payment option offers a higher payment per month but will not continue paying benefits to a spouse who … But that is not the end of the story. Carol, a FERS employee, and her husband Mike decide to take this joint life payout (survivor benefit) and while they are both alive, the monthly pension is $4000. With this annuity, you will get a payout for as long as you live. Michael Boyle is an experienced financial professional with 9+ years working with Financial Planning, Derivatives, Equities, Fixed Income, Project Management, and Analytics. You will likely be given options to have 100%, 75%, 66.67% or 50% of the income continue to the surviving spouse. A single-life pension means the employer will pay their employee's pension until their death. To illustrate, let’s see what happens if Mr. Smith lives 3 more or 3 fewer years different from his life expectancy. A joint and survivor annuity option extends the annuity payment coverage to include the initial individual and a beneficiary, usually the spouse of a retired person. These different pension … If the employee (and/or their spouse in the case of a survivorship pension) exceeded life expectancy, the results may favor taking the annuity. In any case, whether it is a funded or unfunded pension plan, retiring partners typically have a choice as to how they would like to receive payments: over their life, over the joint life of themselves and their spouse or in some cases, a lump sum. If the discount rate in the example was 5%, the present value lump sum would decrease by over $1 million. If Bob was married, he could easily model a Joint and Survivor benefit by entering the Beneficiary Age, Beneficiary Gender, and the appropriate Survivor Benefit Prct (e.g., 50%, 75%, or … In general, annuities are preferable for pensioners who believe that they and their spouse will exceed the average life expectancy. Evaluating a Joint-and-Survivor Annuity Versus Life Insurance, Consider These Things Before You Cash In Your Pension, 4 Common Annuity Payment Terms You Should Know Before Retirement, How to Compare Pension Rates, Lump Sum Distribution vs. Annuity, How to Use an Immediate Annuity for Risk Management in Retirement, 7 Most Frequently Asked Retirement Questions, Best Life Insurance With Living Benefits of 2021. This means that if Sara passes away after one year, the payments would continue to a spouse or beneficiary through year 10 as measured from the first payment. When you reach retirement, and if your company provides a pension program, you will be offered a number of payout options. 1  These terms depend on the source of funds and options … In financial modeling, this is how you make an “apples-to-apples” comparison. In the past, most pensions were unfunded plans (i.e., paid out of current firm earnings) where the firm contractually promised to pay retiring partners a certain amount per year. A joint and survivor option that continues making the exact same payment until both beneficiaries die. This choice reduces the amount of each payment … In this example, we will also need to make an assumption. In addition, if you choose any of the Joint & Survivor Annuity Options … The opportunistic answer for an advisor like this author is, “it depends.”  Unfortunately for the reader, there is no quick and easy, “Google it” answer. Similarly, relative health at retirement should also factor into the decision. Option 4: Social Security Leveling You must be younger than 62 to qualify for this option. This is because they feel confident that will live to receive future installments of the pension. In order to calculate different payment amounts depending on which payment plan an individual chooses, actuaries use mortality tables to determine life expectancy. If Sara chooses the single-life plan with a certain term of 10 years, a payment of $1,620 per month is guaranteed to be paid out for a minimum of 10 years and would continue as long as Sara lives. The required payment form for married employees, the 50-percent joint-and-survivor … In addition, if she is married, her spouse will not receive a survivor benefit. This memo is the first part of a two-part series discussing pension decisions frequently faced by attorneys. Your spouse will be in a precarious financial situation if he depends on the income, making this an unsuitable option for retirees whose priority is income security for their spouse. If you do look into life insurance, get life insurance quotes online, talk to a life insurance agent, or use the services of a fee-only life insurance agent or fee-only financial advisor. As follow-up, the second part will discuss whether there is a benefit to including life insurance as part of the pension evaluation decision. If you opt for an annuity, evaluate the pros and cons of a single-life versus a joint-and-survivor annuity. Over the years, as these pension amounts grew larger as a percentage of profits, firms found themselves with a very large liability. With this option, Sara would get $327 less a month than she would receive under the single-life option. If Sara chooses the 100% joint-and-survivor annuity, she and her spouse will receive $1,414 per month for as long as either of them is still alive. U.S. Bureau of Labor Statistics. If Sara lives for 20 years, she alone would collect $374,400 in total ($1,560 multiplied by 240 months) on a 50% joint-and-survivor annuity, which is over $117,000 more than the lump sum. Now, math. Therefore, in order to be financially better off, it would be necessary to exceed a 2.25% investment rate of return. This is because the 100% survivor … Click here for the Pension Estimator. The amount paid to the surviving spouse must be no less than 50% and no greater than 100% of the amount of the annuity paid during the participant’s life. From a purely mathematical perspective, the variable “T” (time)with the most weight in determining the “right answer” is a question to which nobody has the answer – when will each of you and your spouse die? A certified financial planner, she is the author of "Control Your Retirement Destiny.". If they choose the 50% option… The single life pension was $425,000 per year. Getting all the money up-front can relieve the worry that a retiree won't live to see future payouts. Every pension is unique so the options may vary slightly from pension to pension.