Teacher retirement annuity

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zzzDr
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Joined: Tue Jan 05, 2021 9:45 pm

Teacher retirement annuity

Post by zzzDr »

My wife is about to retire from teaching in Texas. She's 65 and in good health, as am I at age 67. She will receive a retirement annuity from the Teacher Retirement System. There are several options on how the annuity is paid out. First, the Standard Option pays her the highest amount for her entire lifetime with no survivor benefit. Second, she can receive about $500/month less for life, and if she predeceases me I get that same amount for my lifetime. The third option pays about $200/month less for her life, but if I outlive her then I get 50% of her amount. There are two options which are very close to the full amount and which continue for either 5 or 10 years to me if I outlive her. Finally the last pays her $400/month less, and me 75% of her amount if I survive her.

Honestly, I don't know where to start with these options. I feel like we're going to live to the same age more or less, so the Standard Option looks attractive for an extra $500/month, but at the same time it's tough to give up a guaranteed lifetime annuity that would cover both of us: Option 2.

And to make it more confusing, a friend suggested taking the Standard Option and using the $500/month difference from Option 2 to buy a 20 year term life insurance policy on her, which when I checked could buy nearly $1million in coverage.

Just throwing this out to the collective wisdom to help us decide which option to choose.
123
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Re: Teacher retirement annuity

Post by 123 »

A lot of people end up deciding based on their total periodic income picture and how much income results from from all social security, all pensions, all military retirements, etc. You have to consider the consequences of mortality under either scenario.

It also matters if the pension is significant. That depends on how much the other income might be including rental income, investment income, RMDs, etc.

It also depends on whether the pension amount is essential to meeting the expected expenses, now and after the death of one member of the couple.

Many (government related) pensions also include provisions for heath care coverage. That is a significant issue for most people, but not everyone. If no survivor option is elected potential healthcare coverage would have to be changed for the survivor.

No financial decision can be made in isolation.
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Stinky
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Re: Teacher retirement annuity

Post by Stinky »

zzzDr wrote: Tue Jan 05, 2021 10:32 pm I feel like we're going to live to the same age more or less, so the Standard Option looks attractive for an extra $500/month, but at the same time it's tough to give up a guaranteed lifetime annuity that would cover both of us: Option 2.
Welcome to the Forum! Glad that you posted your question.

Sadly, the actuarial statistics say that you'll probably predecease her. You're two years older than her, and females have a built-in "mortality advantage", so the odds are that you will pass away first.

That being said, it sounds like your heart leans toward Option 2, which pays a level monthly amount until both of you pass away. That's the decision that my wife and I came to when it came time to choose the payout option on my defined benefit pension at my retirement. We saw the payout on my pension as a primary source of retirement income, and didn't want to see that income be reduced to zero or even one-half if I passed away before her.

Based on what you've posted, I'd go with your heart - Option 2.
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Golf maniac
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Re: Teacher retirement annuity

Post by Golf maniac »

It really depends on your lifestyle now and the impact on your lifestyle if she dies first and you lose 100% of the pension. If you don’t need the extra $500 a month you could see it as an insurance policy to keep your lifestyle if she dies first. If you don’t need the extra income if she dies first then don’t take a survivor option. It really is an individualized decision based on financial situation and health of the two of you. You can choose a lot of options in between which is a good thing.
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jeffyscott
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Re: Teacher retirement annuity

Post by jeffyscott »

Stinky wrote: Wed Jan 06, 2021 6:59 amThat being said, it sounds like your heart leans toward Option 2, which pays a level monthly amount until both of you pass away. That's the decision that my wife and I came to when it came time to choose the payout option on my defined benefit pension at my retirement. We saw the payout on my pension as a primary source of retirement income, and didn't want to see that income be reduced to zero or even one-half if I passed away before her.

Based on what you've posted, I'd go with your heart - Option 2.
My pension is our primary source of retirement income and we did the same. I did not consider the option that was for my life only, that seems like a terrible choice unless both spouses have a similar pension. The 75% for spouse is probably reasonable too, but I never understand the idea that the annuitant would need 100% but their spouse only needs 75%. A 25% reduction upon the death of either would make more sense to me.

As for the idea of buying insurance with the extra money from the annuitant's life only option, my spouse very much prefers the idea that she would continue to get a monthly income over having another pile of money to manage. Also I think a government guarantee>insurance company guarantee. And there is always the risk of dementia or something leading to mismanagement of the pile of money.

One of our options actually was a 25% reduction upon the death of either and that one would've been attractive to me, but chose the full survivor option as that one was available with an added guarantee of 15 years of payments to beneficiaries should I and my spouse both die prior to collecting for at least 15 years. I liked the idea that someone would get the money, no matter what happened and the difference was like $1 per month to add the guarantee. In the end, they are all about actuarially equivalent, except for not accounting for the sex of the annuitant.
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billfromct
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Re: Teacher retirement annuity

Post by billfromct »

I think it depends on some other things that the Op does not mention:

*does the husband collect SS & how much; will the wife collect SS
*how much does the husband have in retirement savings
*does the wife have other retirement savings
*can the husband continue with the same standard of living if the wife dies

Since the husband is 2 years older & as others have mentioned, females normally have a longer life span, that should have a bearing on the retirement annuity decision.

bill
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jeffyscott
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Re: Teacher retirement annuity

Post by jeffyscott »

billfromct wrote: Wed Jan 06, 2021 9:42 amSince the husband is 2 years older & as others have mentioned, females normally have a longer life span, that should have a bearing on the retirement annuity decision.
My understanding is that age is accounted for. So were he 2 years younger, instead of 2 years older the reduction for taking the joint life option would be greater. That is how mine worked and I assume other states and private pensions do it the same way.

What I assume is not considered is sex, a male annuitant and female annuitant of the same age would get exactly the same pensions. Perhaps it is even required by law that pensions not vary by sex of the annuitant? So there can be a bit of a free lunch when a female takes it for her life only, but the risk is the non-zero chance that the husband lives longer, despite being male and older.

Another thing that is not considered is smoking status. So non-smokers get a bit of a free lunch at the expense of smokers. An insurance company would consider that and other health factors in pricing insurance, the state is not considering any of that in "pricing" the annuity options.
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Nate79
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Re: Teacher retirement annuity

Post by Nate79 »

zzzDr wrote: Tue Jan 05, 2021 10:32 pm My wife is about to retire from teaching in Texas. She's 65 and in good health, as am I at age 67. She will receive a retirement annuity from the Teacher Retirement System. There are several options on how the annuity is paid out. First, the Standard Option pays her the highest amount for her entire lifetime with no survivor benefit. Second, she can receive about $500/month less for life, and if she predeceases me I get that same amount for my lifetime. The third option pays about $200/month less for her life, but if I outlive her then I get 50% of her amount. There are two options which are very close to the full amount and which continue for either 5 or 10 years to me if I outlive her. Finally the last pays her $400/month less, and me 75% of her amount if I survive her.

Honestly, I don't know where to start with these options. I feel like we're going to live to the same age more or less, so the Standard Option looks attractive for an extra $500/month, but at the same time it's tough to give up a guaranteed lifetime annuity that would cover both of us: Option 2.

And to make it more confusing, a friend suggested taking the Standard Option and using the $500/month difference from Option 2 to buy a 20 year term life insurance policy on her, which when I checked could buy nearly $1million in coverage.

Just throwing this out to the collective wisdom to help us decide which option to choose.
Are you sure you have gotten actual quotes from a life insurance company that they will insure her, at age 65 for $500/month for $1m coverage?
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ipdiddly
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Re: Teacher retirement annuity

Post by ipdiddly »

To answer this question properly, one needs to understand the couple's actual financial situation and their needs.
When my wife and I elected our pensions, we decided to take the max with no survivor benefit. But that was mainly because each of us had a modest pension and that the survivor would be fine living on only his/her pension plus savings. Our only concern, frankly, in electing a no survivor option, was what if one of us dies one or two years later and loses the entire value of the pension. So we each purchased a modest 10 year term policy that would pay the survivor in case of an early death. Those policies have now expired. Of course, we could have elected survivor options as well since our assets are sufficient to live on regardless.
I'm not an annuity specialist, but taking a $500/mo hit ($6000 per year) doesn't seem like such a bad deal for getting a 100% survivor benefit. Then again, as one commenter pointed out, the likelihood of a male surviving the female spouse is low. The option that pays you for 5 or 10 years may also be suitable depending on the extent of reduction in the pension.
Final thought: Before making a decision, ask your doctor to let you know precisely how long he expects you to live. I did that and he wouldn't give me a number. Darn.
sport
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Re: Teacher retirement annuity

Post by sport »

We have a similar situation, so I can tell you what we decided. DW has an Ohio teacher pension and I have social security. DW gets no benefit from my SS due to the Government Pension Offset. She also would get no survivor SS benefit. We decided on a 50% beneficiary option for me if I outlive her. In this case, I would have my SS and the 50% pension. If she outlives me, she would have her pension. So, it comes out about the same for either of us. For a small decrease in the pension, DW elected "reversion". This means that if she outlives me, her pension reverts to the full amount (the amount with no survivor benefit).
billfromct
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Re: Teacher retirement annuity

Post by billfromct »

My point, that I didn’t get across clearly, was depending on the husband’s retirement assets & the fact that he is older & will probably die first; if his retirement assets & SS are enough for him to live a comfortable retirement, she should get the highest payment option with no survivor benefits.

If he has low or no retirement assets & low SS benefits, she should get one of the options that provide a benefit for her husband, should she die before him.

bill
Last edited by billfromct on Wed Jan 06, 2021 10:42 pm, edited 1 time in total.
JimMolony
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Re: Teacher retirement annuity

Post by JimMolony »

We're in a similar situation. My wife is 5 years from retirement (currently 55). California teacher with Government Pension Offset so she'll get no Social Security and none of my Social Security if I pass before her.

The difference between her being the only benefit receipt and me getting 100% of the benefit if she passes away before me is $3,552 per year. I got an on-line insurance quote under the pretense that she is 60 years old (that's when she'll retire) for a $500,000, 15 year term policy. I assumed her to be in good health in 5 years (knock on wood). The term policy quote spit out from their algorithm was $1,800 per year.

Assuming she's in good health at 60, we'll probably take the extra $3,500 a year and pay for the term insurance as a mitigation strategy. Why $500,000 policy? Why 15 years? I just looked at it as an income replacement source. I'll do a more thorough assessment as we get closer to retirement.

Hope that helps. It may be worth getting a free term online insurance quote.
Cruise
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Re: Teacher retirement annuity

Post by Cruise »

OP: My wife has pension options like yours. For us it is a nobrainer to insure against her predeceasing me. Actuarially, it probably is a wash, but why risk it? Good luck with your decisions.
crefwatch
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Re: Teacher retirement annuity

Post by crefwatch »

It might be worth inquiring (especially since it's a captive plan, not a predatory insurance company) whether all payout choices are computed to be actuarially neutral. That's quite common, but you can't just assume it to be so. I'm surprised to hear that the Basic choice is one-life. My multi-employer union pension is almost impossible to get as one-life. The management (meaning the UNION trustees) may have seen too many widows left with too little to live on. (personal guess ... )

I agree that the family's total needs and income streams are involved, and the OP does not provide that information. The best answer can't be given with what we have.

I speculate (by reading between the lines of the OP) that the poster may be feeling the annuity regret of "betting" with an insurance company. That's not the way to make the best personal choice for two particular individuals.
Wrench
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Re: Teacher retirement annuity

Post by Wrench »

Stinky wrote: Wed Jan 06, 2021 6:59 am
zzzDr wrote: Tue Jan 05, 2021 10:32 pm I feel like we're going to live to the same age more or less, so the Standard Option looks attractive for an extra $500/month, but at the same time it's tough to give up a guaranteed lifetime annuity that would cover both of us: Option 2.
Welcome to the Forum! Glad that you posted your question.

Sadly, the actuarial statistics say that you'll probably predecease her. You're two years older than her, and females have a built-in "mortality advantage", so the odds are that you will pass away first.

That being said, it sounds like your heart leans toward Option 2, which pays a level monthly amount until both of you pass away. That's the decision that my wife and I came to when it came time to choose the payout option on my defined benefit pension at my retirement. We saw the payout on my pension as a primary source of retirement income, and didn't want to see that income be reduced to zero or even one-half if I passed away before her.

Based on what you've posted, I'd go with your heart - Option 2.
Another consideration: if she predeceases you then you will presumably go from filing as MFJ to single. Thus, your tax rate may go up if your income stays the same. In other words, if you take the 100% option, a bigger chunk of that will go to taxes then when she was alive. Depending on your specific situation, the reduced income of the 50% option may mean the same or maybe even a lower tax bracket. As a result, it could turn out that the 100% option only gives you 25 or 30% more after tax income than the 50% option. I'm really just guessing here because the details depend on your specific situation. But my point is you should probably estimate the after tax income for all the scenarios to make the wisest choice.

Wrench
Topic Author
zzzDr
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Re: Teacher retirement annuity

Post by zzzDr »

Thanks to everyone who replied. I read all the comments carefully.

She will get SS in addition to her annuity, so if she were to predecease me that would stop, and my lifestyle on just my social security would diminish. But without her I think spending would be way down- travel, dining, automobile costs, clothing etc. Plus she's healthy now; most likely we'll be old enough when either one of us passes that we'll be pretty much homebodies, if not in an elder home.

Higher taxation with the full survivor benefit is really hard to figure but makes sense. I assume we'll be in a low tax bracket in retirement, but I have a 401k and will have to take required distributions in a few years.

I don't like dealing with insurance companies and don't trust them. I think we'll take that idea off the table.

Overall, I'm leaning towards a reduced survivor benefit, probably 50%. I'm comforted by the suggestion that actuaries have calculated that all these options are about equal, but I'm disappointed that we get no special consideration for taking good care of our health.

Again, thanks for the thoughtful replies.
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gwe67
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Re: Teacher retirement annuity

Post by gwe67 »

It is actuarily neutral and adjusted for sex of the spouse. If she chooses Option 1, you must agree and sign off on it. No agreement is required if she chooses Option 2.

I chose Option 2 with the understanding that DW will also choose Option 2 at retirement time. If she falters and wants Option 1, I will not sign. :shock:
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