Payout options for your state pension

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Q. I’m going to retire in a few years and I will get a state pension. I can choose a survivor option for my spouse worth either 25, 50, 75 or 100 percent of the benefits. How do we choose which is best?
— Almost there

A. Congrats on getting closer to retirement.

Choosing a Qualified Joint and Survivor Annuity (QJSA) option guarantees that a spouse will continue to receive income after the participant’s death.

It is mandated by law, under ERISA and the Internal Revenue Code, and the amount of the survivor annuity may not be less than 50 percent or more than 100 percent of the annuity that was paid during the joint lives of participant and spouse, said Frani Feit, a certified financial planner with Tradition Capital Management in Summit.

Feit said the selection can be waived and the participant can elect an optional survivor annuity with the spouse’s approval.

In order to determine which survivor option makes the most sense, you need to consider a few factors, including your ages, current and projected living expenses and net worth.

Let’s look at a 50 percent Joint and Survivor (J&S) scenario. If the participant receives $24,000 per year, when he passes, his wife would receive $12,000.

The question: Can she afford to take a $12,000 hit to their annual income?

“That would depend on what other outside assets they own that could compensate for this decrease,” Feit said. “If their budget cannot sustain a 50 percent drop, then the couple should elect 100 percent J&S and the spouse would continue to receive the same amount after the participant’s passing.”

When looking at the figures, Feit said, a participant will receive the largest monthly benefit when electing the smallest survivor option.

So in your example, the 25 percent J&S option will pay the most while both spouses are alive, and then pay the survivor 25 percent of the previous benefit, Feit said.

“Bottom line, a lump sum retirement benefit is annuitized based on actuarially determined life expectancy and mortality factors unique to the couple,” she said. “If one spouse is significantly younger than the other, the benefit may be further reduced to compensate for the expected longer payout time frame.”

Feit says when she has clients who are weighing their pension distribution options, she sets up “what if” scenarios with the projected figures.

“In this way, we can review each survivor option in the context of the client’s other investments and living expenses to make sure the surviving spouse is adequately protected,” she said. “The goal is to balance protection with a monthly payout so the couple can use the money together while presumably they are both alive to enjoy retirement.”

Good luck making the right decision for you.

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This post was first published in July 2017. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.