Chapters

00:00 Introduction to PERS Option 3 and Its Purpose

00:33 Understanding the Category of Option 3: Joint and Survivor Annuity

01:37 Calculating the Monthly Benefit and Actuarial Reduction

02:33 Beneficiary Requirements and Restrictions

03:40 Implications of Choosing Option 3 Forever

04:16 Partial Lump Sum and IRS Limitations with Option 3

04:44 IRS Rules on Beneficiary Age Differences and Benefits

05:29 Who Should Consider Option 3: Scenarios and Recommendations

06:25 Action Items: How to Proceed with Choosing Option 3

07:16 Next Video Preview and Disclaimer

Transcript

Hi everyone, I'm Ryan Early, Vested PERS member, former school finance officer, and host of the PERS Pro YouTube channel. If you ever wondered how to provide a lifetime safety net for two loved ones instead of just one, today's deep dive into option three is exactly what you need. We'll discuss what it is, how it's calculated, and who should consider it. Let's get started.

In our last video, video number 37, we explored option two, which provides a 100 % survivor benefit for one person. Today, we are staying within the joint and survivor annuity family to look at option three, the 100 % joint and survivor annuity fixed for two beneficiaries. To understand option three, you have to understand its category. It is a joint and survivor annuity. While the single life annuity options we discussed in videos 35 and 36,

Focused on only your lifetime, option three is designed to provide a monthly benefit during your life and the lives of two named beneficiaries. there are two key concepts with option three, reduced monthly benefit. Like option two, you accept a smaller check during your lifetime than you would under the maximum retirement allowance option. Split survivor benefit.

In exchange for that reduction, after you pass, your two beneficiaries will each receive 50 % of your monthly benefit for the remainder of their lives.

How is the monthly benefit amount for option three actually determined? Your monthly benefit calculation under option three starts with the same two ingredients and calculation we discussed in video 35. Those ingredients are your average compensation or highest four years and your service credit factor.

a percentage based on your total service credit. The result of this calculation forms your maximum retirement allowance, which is the amount available under the maximum retirement allowance option. However, for option three, PERS applies an actuarial reduction to your maximum retirement allowance amount. Because option three covers three lives, yours and two others, the actuarial reduction is typically more significant than option two.

PERS calculates this reduction based on the ages of all three parties at the time of your retirement. The result after your actuarial reduction is your option 3 benefit amount.

The beneficiary provisions contained within option 3 are different from the provisions contained within the maximum retirement allowance option, option 1 and option

How many beneficiaries can you have under option 3? You must name exactly two beneficiaries for the survivor benefit.

Who can be named as a beneficiary under option three? Only a natural person, not in a state or trust. And note that your beneficiary does not have to be your spouse. What does your beneficiary get under option three when you pass? Each beneficiary receives 50 % of the retiree's monthly benefit for the rest of the beneficiary's life. If one of those beneficiaries die, then your remaining beneficiary receives 100 %

of the monthly benefit for the rest of their life. Can you change your beneficiary under option three? No, you cannot change your beneficiaries. Option three is the only option that requires you to name exactly two beneficiaries, and it is the only option that does not allow you to change your beneficiary under any circumstances.

A common question is, if I pick option three now, am I stuck with it forever?

Unfortunately, the answer is yes, you are stuck with it forever. Option 3 does not allow for a pop-up or pop-down provision. This means that after retirement, you cannot pop up to the maximum retirement allowance option and you cannot pop down to a different joint and survivor annuity, such as option 2, option 4, or option 4A. However, under option 3, in the event one of your beneficiaries die,

Your remaining beneficiary will receive 100 % of the monthly survivor benefit.

What about Partial Lump Sum Option and Internal Revenue Code Limitations with Option 3? Partial Lump Sum Option Availability. If you are eligible, you can combine Option 3 with a Partial Lump Sum Option. Just keep in mind this will result in a double reduction. One Actuarial Reduction for the Survivor Protection and one Actuarial Reduction for the cash taken upfront. IRC Limitations. This is really important under Option 3.

The IRS does have rules about naming a beneficiary who is significantly younger, usually more than 10 years younger, for a 100 % survivor benefit. For example, if you name your spouse and a child as your option three beneficiaries and your spouse passes before you do, and the child defaults to receiving 100 % of the survivor benefit, Internal Revenue Code 401A9 and the Minimum Distribution Incidental Benefit Requirement, or MDIB,

may limit their benefit amount otherwise allowable under option three. Definitely think twice before going this route. There are other benefit options that provide a survivor benefit for a younger beneficiary that are not subject to these IRC limitations.

So who should consider option three? Here are examples of situations where a retiree should consider option three. Retirees with a dependent spouse and child. If your spouse is a caretaker for a special needs child,

and they both rely on your PERS check to pay the bills, and those bills won't change over time, option three ensures their lifestyle doesn't change when you pass, but be aware of potential IRC limits. Single retiree supporting multiple siblings. If you are single and live with and fully or partially support two siblings or other family members, option three allows you to split the survivor protection equally between them so you can continue supporting them. Specific legacy planning.

If you are a widow and your retirement is financially secure without much need for PERS monthly benefits, you can set up a lifetime annuity for two children, but be aware of potential IRC limits.

If you are considering option three, here are your action items for today. One, request an estimate of benefits. Request your estimate of benefits from PERS, and once you receive your estimate, identify what the monthly benefit amount would be if you selected option three.

and make sure that monthly amount fits within your retirement spending plan for both you and your beneficiaries' lives. Two, talk to your beneficiaries. Ensure they understand that the benefit under option three is for both your and their lifetimes and that the benefit available under option three will be less than what is available under the single life annuity options. Three, review your beneficiary information. Ensure your beneficiary information is current.

Remember, you must name exactly two under option 3, and if updates are needed, file Form 1B with PERS. In our next video, we'll provide an overview of base option 4 and who should consider it. Please make sure you subscribe so you don't miss this and other videos in our new retirement series. If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members.

If you have a follow-up question about PERS or anything else related to personal finance, please visit our website at perspro.ms and submit your question or topic for a future episode. Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Ryan Earley (07:51)

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Ryan Earley (08:06)

Disclaimer. This video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi.

Always consult a qualified professional for personal advice specific to your situation.