Should I Choose a Pension Option?
By Richard Alles, Deputy Chief FDNY, Ret.
One of the most common questions that we get from firefighters who are in the process of retiring is whether they should choose an “option”, or take a full pension and increase their life insurance coverage. There’s no easy answer to that question, because there is no one size fits all when it comes to planning for retirement. Factors such as a member’s age, health, and financial situation, as well as the age and health of their spouse are all relevant in making this important decision.
What is an option?
Let’s start with the premise that a member who elects to take a “full pension” will receive payments up until the date of his death. This will be the largest monthly payment, but a surviving spouse gets nothing after the member’s death. An option is a one-time election that a member makes at retirement, to provide for pension benefits to a beneficiary after the member’s death. In electing an option, the retiree accepts a reduced retirement allowance. The reduction is based on the option selected, age of the member, and sometimes the age of the beneficiary. The main advantage to a pension option is that a defined pension amount continues to be paid out, after the member dies, over the course of the beneficiary’s life. If the member does not take an option, there must be adequate life insurance in place, which generally pays out a lump sum that must be managed carefully to support the surviving spouse for life. Not an easy or stress free task!
Including “Pop-Up” provisions, there are currently six pension options to choose from.
Once the pension is finalized the option cannot be changed.
The six options:
Option 1: was only available to Tier 1 members and will not be discussed here.
Option 2, Joint and 100% Survivor: The retiree receives a reduced monthly lifetime allowance. Upon the death of the retiree, this option allows the named beneficiary to receive 100% of the reduced pension allowance for life. Only one beneficiary may be named, and the designated beneficiary may not be changed once the option is in effect. So, if your spouse pre-deceases you, or you divorce your spouse, you may not choose a new beneficiary.
Option 3, Joint and 50% Survivor: The retiree receives a reduced monthly lifetime allowance. Upon the death of the retiree, this option allows the named beneficiary to receive 50% of the reduced pension allowance for life. Only one beneficiary may be named, and the designated beneficiary may not be changed once the option is in effect.
Option 4, Lump Sum: The retiree receives a reduced annual pension allowance for life with the provision that upon the death of the retiree, the beneficiary (or beneficiaries) will receive a limited lump-sum payment specified by the retiree at the time the option is chosen. More than one beneficiary may be named and the beneficiaries may be changed at any time;
Option 5, Annuity: The retiree receives a reduced annual pension allowance for life with the provision that upon the death of the retiree, the beneficiary will receive some other specified annual annuity. Only one beneficiary may be named, and the designated beneficiary may not be changed once the option is in effect.
Pop-Up Option Modification: Under this option modification, if the named beneficiary predeceases the retiree, the retirement allowance reverts back to the maximum retirement allowance. This Pop-Up provision may only be applied to Option 2, Option 3, and Option 4 annuities. There is an extra cost for this option.
Attend a pension seminar
Among many other retirement issues, these options are discussed at the monthly FDNY Pension Seminars held in the first floor auditorium of FDNY Headquarters. We strongly advise any member contemplating retirement to attend the seminar and to even go multiple times. No registration is required unless you are actually planning to submit a retirement application. We also strongly advise that you bring your spouse along. The decision you make will affect both of you, and it deserves careful consideration. Two heads are certainly better than one in these matters.
Meet with a financial planner and discuss your future with your union trustee
There is no “one size fits all” when it comes to your retirement. For some members, taking an option is the first thing to do. For other members, a full pension and life insurance is the best choice. Depending on your age and health, you may be entitled to a “preferred rate”. Life insurance policies allow you to change beneficiaries, and may accrue cash value. Some financial advisors recommend term life insurance, while others recommend a blend of term and whole life insurance. And, some policies have options that enable members to stop paying premiums if they retire due to a disability and/or get social security disability. We urge you to talk to your union trustee and financial planner. They have the most experience to give you the best advice – for your particular circumstances.