What is a Pension Option?
Once you come to the end of your FDNY career you will be faced with a decision on what you will be receiving in retirement from the FDNY in the form of your pension. The final pension option will be based a formula that will include but is not limited to your pensionable salary, 1/60th of the total earnings after your 20th work anniversary, annuitized ITHP under and over 20 years, taxable annuitized contributions, and possibly the amount you have in your pension excess account (ITHP and 50% Indicator) if you decide to roll those amounts into your pension.
After the FDNY computes your final numbers based on their formula, you will have a choice on what type of pension option you and your family will be receiving during your retirement days.
Maximum Pension Option
At retirement, you can choose to receive the maximum retirement allowance. This choice will give you the largest annual benefit that one can receive from the FDNY for one’s pension. If you choose this pension option, you will receive the maximum allowance throughout the member’s lifetime and will stop upon the death of the retired FDNY member. There will not be any payments made to the family or beneficiary of the retired member.
This option will be a benefit to the retired member because they will be able to receive the most money from the city during their retirement. The retired member has earned the right to get the most out of the FDNY as they have courageously put their life on the line numerous times to help others. A potential downfall from choosing this option would be the retired member could be leaving their spouse or family in a vulnerable financial situation god forbid they were to pass away early on into their retirement. A popular way that retired members protect their family while also choosing this option is by having a life insurance policy on themselves that would help their family cover some or all of their annual pension.
Joint and 100% Survivor Option
If you were to choose this pension option when you retire you will be receiving a reduced month lifetime income compared to the Maximum Pension option. However, you will be able to name a beneficiary for this option. Therefore, if the retired member passes away before the named beneficiary, the beneficiary will receive the same pension amount as before. There will be no stop in pension income for the family if the member predeceases the named beneficiary.
The benefit of choosing this option for the member is that they will be able to protect their family no matter how long or short they live in retirement. Their loved ones will have the security of having a substantial income during both the retired member’s and beneficiary’s lifetime no matter what life throws at them. A disadvantage of this option is that the retired member is taking a haircut on the amount they will receive in their pension annually. Additionally, if the listed beneficiary were to pass away before the retired member, the beneficiary cannot be changed, and the retired member will be stuck at the lower annual pension amount.
Joint and 50% Survivor
Similar to the 100% Survivor option, if this option is chosen the member will receive a reduced annual pension compared to the maximum pension option. This option will be more than the 100% survivor option annually because if the member passes away before the beneficiary, the beneficiary will receive 50% of the annual pension. For example, if the retired member chose this option and was receiving $80,000 in retirement and were to pass away, the listed beneficiary would then receive $40,000 for the rest of their life.
The benefit of choosing this option is that it will provide some additional income to their family if the listed beneficiary out lives them. Also, the member will be receiving a higher annual pension compared to the full 100% survivorship option. However, the same disadvantage exists with the 100% survivorship option which is if the listed beneficiary were to pass away before the retired member, the beneficiary cannot be changed, and the retired member will be stuck at the lower annual pension amount.
Pop Up Options
For both the 100% and 50% survivorship options there exists an add on to them. This add on is called the “Pop-Up” Option. In this option, if the beneficiary listed for the survivorship options were to predecease the retired member, the retired member would then revert to their maximum pension allowance. The main disadvantage for this “Pop-Up” Option is that there is an additional cost to the retired member and will be sacrificing more annual pension income compared to both survivorship options. This option does however, give the retired member the ability to revert back to the maximum allowance if the listed beneficiary were to predecease the retired member.
Can you Change Your Pension Selection?
Once you retire from the FDNY you are going to have to selection the pension option that best fits your unique financial situation. If you submit the Maximum Pension option to the city you will receive 90% of maximum allowance until your pension is finalized. If you choose one of the survivorship options, you will receive that amount until your pension choice is finalized. Once your pension decision is finalized you will NOT be able to change your selection. Therefore, you should start thinking about and planning for which option you are going to choose when you retire long before your actual retirement date.
Additionally, if you do go with a survivorship option you must name a beneficiary when you do so. As soon as your pension is finalized you will not be able to change or update the listed beneficiary no matter what life throws at you or your family. The finality of these pension choices should factor into your decision on what pension option you are going to pick.
What Option Should You Choose?
Before choosing which option, you are going to pick you should take into consideration several factors. Some of those factors could include the health of both the retired member and the proposed beneficiary, other sources of income during your retirement, the size of your retirement accounts, the amount of life insurance you may or may not have on yourself to protect your family, the amount of money you are going to need in retirement, and your family health history. You should consult a financial professional that is well versed on pension options to see what they might recommend after learning about you and your family’s unique financial situation and goals.