Chapters

00:00 Introduction to Option 1

01:36 Monthly Benefit & Refund Provision

03:01 Beneficiary Provisions

03:50 Option to Change Provisions

04:44 Partial Lump Sum Option Provision and Internal Revenue Code Limits

05:25 Who Should Choose Option 1?

06:25 Action Items for Considering Option 1

07:51 Preview of Next Video and Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, former school finance officer, and host of the PERS Pro YouTube channel. In our last video, video number 35, we did a deep dive into the maximum retirement allowance option. Today, we are exploring option 1, which is the other single life annuity, but with a much slower, more beneficiary friendly way of handling your account balance if you pass early. Let's get started.

Both the maximum retirement allowance option and option 1 are classified as single life annuities. What this means, these options pay you a monthly benefit for as long as you live, but the checks stop immediately upon your death. There is no continuing monthly check for a survivor under these options. The shared safety net, both the maximum retirement allowance option and option 1 allow for a refund of your contributions and interest if you die before quote unquote using them up. The crucial difference between the two, the difference lies in how fast you use up those contributions and interest in the eyes of PERS. Under the maximum retirement allowance option, your account balance is reduced dollar for dollar by every cent you receive in monthly benefits. However, under option 1, your account balance is reduced on a pro rated basis over your actuarial life expectancy, resulting in a slower reduction.

Option 1 provides the second highest monthly payment of the seven base options. It is slightly lower than the maximum retirement allowance option because you are paying for that slower reduction of your account balance. Let's consider a hypothetical example. Imagine a retiree with $100,000 in contributions and interest in their account balance and an actuarial life expectancy of 20 years at retirement with equal probability of passing each of those 20 years. Under option 1, your account balance is reduced by one 20th or 5 % or $5,000 every year, regardless of how large your actual monthly retirement benefit amount received was. The result, if this hypothetical retiree passes away 10 years into their retirement, they have used up 10/20th or half of their account balance. Their beneficiary or beneficiaries receive the remaining $50,000 in a ⁓ one-time lump sum. Contrast: Under the maximum retirement allowance option, that same hypothetical retirees $100,000 account balance would be wiped out much faster because the entire monthly retirement benefit amount, which includes the employer's portion, is subtracted from the account balance each month.

The beneficiary provisions contained within option 1 are very similar to the provisions contained within the maximum retirement allowance option. How many beneficiaries can you have? You can name one or multiple beneficiaries under option 1. Who can be named as a beneficiary? You can name a natural person like a spouse and or child or even an entity like an estate or trust under option 1. What do your beneficiaries get? Under option 1, your beneficiary or beneficiaries get a one-time lump sum of the remaining pro-rated account balance if any exists at the time of your death. Can you make changes to your beneficiary? You can change your beneficiary at any time after retirement under option 1 by filing a beneficiary nomination form, form 1B with PERS.

Common question is, if I pick option 1 now, am I stuck with it forever? Generally, your choice is irrevocable once you start receiving your retirement benefit. However, there is a pop-down provision that applies. If you select option 1 and later get married, you are able to pop down to a different option, option 2, 4, or 4A, to provide a lifetime benefit for your new spouse. This will result in an actuarial reduction of your monthly benefit for the rest of your life to pay for that additional protection. Note, however, you must apply for the pop-down within one year of the date of the new marriage. If you select option 1, you cannot, however, pop up to the maximum retirement allowance option later. That feature is only for those who started with a reduced joint and survivor option. That's option 2, 4, or 4A.

What about Partial Lump Sum option and Internal Revenue Code Limitations with option 1? Partial Lump Sum option availability: Even if you are eligible for the Partial Lump Sum option by meeting the requirements for your tier, you cannot combine the Partial Lump Sum option with option 1. If you are eligible and want a Partial Lump Sum upfront or PLSO, you must choose one of the other six retirement benefit options. Internal Revenue Code Limitations: Since this is a single life benefit, Internal Revenue Code 401A9 usually does not limit your benefit amount under option 1.

So who should choose option 1? Retirees that are looking for a single life annuity but don't need the highest monthly benefit amount available under the maximum retirement allowance option. Here are some examples of situations where retiree should consider option 1. The single retiree with one time lump sum needs: If you have no dependents or spouse who relies on your income, there is less of a need to take a pay cut for survivor protection. And if you have a need for a one-time lump sum if you pass early, for example, paying off debt or taxes, selecting option 1 could provide that monetary protection. The financially secure retiree looking to leave a legacy: If you are a financially secure retiree that does not need the highest benefit amount afforded under the maximum retirement allowance option, then you can defer retirement income and federal income taxes to a future period where any remaining account balance could be distributed to your beneficiary or beneficiaries.

If option 1 sounds like it could be a fit for you, here are your action items for today. One, estimate your account reduction rate. Look at your estimate of benefits. Divide your account balance by your life expectancy to estimate how much of your account balance will be reduced each year to give yourself an idea of what the potential refund to a beneficiary might be in any given year if you pass early. Two, review retirement spending plan against estimate of benefits. After receiving your Estimate of Benefits, compare Option 1 monthly benefit amount to your monthly spending plan. If you have a spouse, make sure your surviving spouse has enough of their own retirement income to live off of should you pass early. 3. Check the Beneficiary. Ensure your beneficiary information is current and if updates are needed, file Form 1B with PERS. This is especially important as it is more likely under Option 1, as compared to the maximum retirement allowance option that a refund to your beneficiary will be made.

In our next video, video number 37, we'll move on to the Joint and Survivor options with an overview of Base Option 2 and exploring who would benefit the most from 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.

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.