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Choosing an Annuity Option
An annuity option choice must be made on a case by case basis. Unless you can look into the future, you may not know the "best" choice. If you choose a joint survivor option and your spouse dies within a short time; you will receive a lower pension for the rest of your life in "payment" for a benefit which your spouse never received. If you choose a life only option; your death may end an income source just when it is most vitally needed. The decision may not be an easy one, but you can increase your odds of selecting the most appropriate option by gathering the facts and understanding the implications.
The joint survivor options may be seen as a form of life insurance. The retiree's regular monthly benefit reduction can be considered the premium paid for the insurance. If addition protection is needed, the obvious way is to purchase more life insurance. But, buying insurance will probably be more costly than any of the joint survivorship options unless your spouse were to die relatively soon causing your premiums to stop.
THE FIRST KEY is your health and life expectancies. What is the state of your health and how will existing physical conditions affect your normal life expectancies? What are the health histories of your parents? An awareness of genetics and a thorough physical examination may help you make your decision.
THE SECOND KEY is your financial condition at retirement. How much will the pension be missed? The amount of income-producing assets or life insurance may be more than enough to provide future financial security for your spouse. Will your spouse have his/her own pension and social security benefits? By completing a balance sheet, a cash flow profile, and income needs estimate, you will have a better idea how dependent the surviving spouse will be upon your pension.
THE THIRD KEY is the age of the beneficiary. The monthly reduction in pension benefits by choosing a joint survivorship benefit option is determined by the amount of continuing benefit and ages of the participant and beneficiary. If both are age 59, the 75% Continued to Named Joint Survivor annuity option will cost 9.7% of the Life Only monthly pension. If the participant is 59 and the beneficiary is 62, the cost decreases to 8.1%. If the participant is 59 and the beneficiary is 55, the cost escalates to 11.9%. Therefore, if your beneficiary is substantially younger than you, a joint survivorship option may be very costly.
The decision to choose the accelerated payment option, which is available only to participants under age 62, should be made on need, life expectancy, or alternative sources of income. I tend to advise members who need to provide a lifetime survivor benefit not to choose the accelerated option.
After you have factored the annuity options into your financial planning, make your choice and don't worry. You know you have taken all reasonable precautions to protect yourself and your family.