With over 225 FDNY members – as clients of our firm – we’ve been involved in the decision-making process regarding pension options at retirement quite often. The pension is obviously a huge element of a firefighter’s retirement package and all too often a firefighter will wait until they retire to consider which pension option fits their situation the best. By understanding what the different options are and how they impact life during retirement – in the years BEFORE you retire – the retiree can end up with a much higher income.
How Does Your Pension Work?
The pension basically works like this: the retiree will be offered the maximum amount earned during their career – as Option #1. Upon accepting this maximum amount, you understand that whenever you pass away, that income dies with you. In other words, spouse and family loses that income when you die. Option #2 – or the Survivorship Option – is when a retiree agrees to a lesser amount than the maximum – in order to make sure the spouse still collects an income should the retiree pre-decease the spouse. Once you choose your pension option – it cannot be reversed – its permanent. On the surface, if you have a spouse, it seems obvious that utilizing the Survivorship Option makes the most sense, but let’s look at a few numbers to illustrate the pros and cons.
Hypothetically, let’s assume that the Max Option is $90,000 a year and the Survivorship Option will bring in $78,000 a year. If you choose the $90,000 and you pass away – the $90,000 dies with you. If you choose the $78,000 and you pass away, your spouse will receive $78,000 for as long as he or she lives. Assuming you retire at age 55 and you choose to protect your spouse by taking the $78,000 – what happens if you DON’T die early and live to age 90? You left $12,000 a year of your money – on the table – for 35 years – or $420,000.
Does a Survivorship Option Make Sense for You?
Conversely, one must consider the possibility that you choose the Survivorship Option of $78,000 – and God forbid – your spouse passes away early in your retirement – you are now stuck at the $78,000 income level for the rest of your life. The Survivorship Pension is ONLY for your spouse’s benefit and can not be redirected to your children. (Now, there are other options called “pop-up options” that can bring you up to your max number should your spouse pre-decease you, but that would mean taking even less from the beginning than the $78,000.)
Using Life Insurance to Maximize Your Pension
The benefit of analyzing these options years before retirement is that you can put strategies in place to account for these life and death events that inevitably take place in our retirement years. One very common strategy is having life insurance and choosing the max pension. With life insurance in place, the retiree can collect the max income that he or she is entitled to – and if he passes away the life insurance kicks in to protect the spouse. If the retiree lives until age 90 – then he or she didn’t leave that $12,000 a year on the table for 35 years. On the other hand, if a retiree’s spouse dies during retirement, the retiree continues to collect the max pension and he can either drop the life insurance or change the beneficiary to his children.
In most cases, it makes more sense financially, to have life insurance and collect the max pension than to take a Survivorship Option. It also gives the retiree more flexibility in dealing with life’s many twists and turns. One report says that 85% of FDNY retirees incorporate this strategy. However, this strategy can only work if the individual medically qualifies for life insurance – and has the right amount in place. When firefighters wait until they retire to consider this strategy, many times their health is not conducive to obtaining life insurance and thus are forced to take the lesser Survivorship Option amount. So, meet with an advisor several years before retirement to determine if this strategy makes sense for you. A big advantage of putting this in place as early as possible is that life insurance is cheaper – the younger and healthier you are.