Chapters

00:00 Introduction to Joint and Survivor Annuities

01:27 How to Calculate Monthly Benefit Under Option 2

03:23 Pop-up Provision Under Option 2

04:15 PLSO Availability and IRC Limits Under Option 2

05:23 Who Should Consider Option 2?

05:57 Action Items for those Considering Option 2

06:44 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 two videos, we broke down the two single life annuity benefit options that PERS offers, the maximum retirement allowance option and option 1. Today, we are moving on to joint and survivor annuities by exploring option 2, the 100 % joint and survivor annuity with pop-up provision. We'll discuss what it is, how it's calculated, and most importantly, who should consider it? Let's get started.

In order to understand what option 2 is, you first have to understand the term joint and survivor annuity. While the life annuity options we discussed in video 35 and 36 focused on providing monthly benefits during your lifetime, option 2 focuses on providing a monthly benefit during your and your beneficiary's lifetime. There are two key concepts to a joint and survivor annuity. First, reduce monthly benefit: Under option 2, a PERS retiree accepts a reduced monthly benefit during their lifetime. Two, survivor benefit: In exchange for the reduced monthly benefit, after the PERS retiree passes away, the exact same monthly benefit continues to be paid to the name beneficiary for the remainder of their life too.

How is the monthly benefit amount for option 2 actually determined? Your monthly benefit calculation under option 2 starts with the same two ingredients and calculation we discussed in video number 35. Those ingredients are your average compensation or highest four years and your service credit factor, which is 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 2, PERS applies an actuarial reduction to your maximum retirement allowance amount. This reduction is based on the ages of both you and your beneficiary at the time of your retirement. The younger your beneficiary is compared to you, the larger the actuarial reduction will typically be because PERS expects to pay that monthly benefit for a much longer period of time. The result after your actuarial reduction is your option 2 benefit amount.

The beneficiary provisions contained within option 2 are different from the provisions contained within maximum retirement allowance option in option 1. How many beneficiaries can you have under option 2? You must name exactly one beneficiary for the survivor portion. Who can be named as a beneficiary under option 2? Only a natural person, not an estate or trust. And note that your beneficiary does not have to be your spouse. What does your beneficiary get under option 2? 100 % of your monthly benefit for the rest of the beneficiary's life. Can you make changes to your beneficiary under option 2? Generally, this is not allowed after retirement unless a pop-up event occurs. Unlike the maximum retirement allowance option in option 1, where you can name a trust in multiple beneficiaries, option 2 requires one human being because their life expectancy determines the math behind the actuarial reduction.

A common question is, if I pick option 2 now, am I stuck with it forever? This is a very relevant question in the case of your beneficiary, such as a spouse, passing away before you and you no longer needing the survivor protection. Fortunately, option 2 comes with a pop-up feature. If your name beneficiary dies before you, or if you get divorced and the court awards you the full benefit, your monthly benefit can pop up to the higher maximum retirement allowance option. You must apply and the timing of applying for the pop-up is important because in the event your beneficiary dies and you file late, the recalculation of your benefits can be retroactively applied for only up to three months. Also remember that if you pop up to the maximum retirement allowance option, you still have to name a new beneficiary.

What about partial lump sum option and internal revenue code limitations with option 2? PLSO availability: If you are eligible for partial lump sum option, you can combine option 2 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 2. The IRS does have rules about naming a non-spouse beneficiary who is significantly younger, usually more than 10 years younger, for a 100 % survivor benefit. For example, if you name a child as an option 2 beneficiary, Internal Revenue Code 401A9 and the Minimum Distribution Incidental Benefit Requirement, or MDIB, may limit their benefit amount otherwise allowable under option 2. Definitely think twice before going down 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 2? Here are examples of situations where retirees should consider option 2. Retirees with a completely dependent spouse: If your spouse relies on your PERS check to pay the bills and those bills won't change over time, option ensures their lifestyle doesn't change if you pass away first. Couples with major differences in health: If you have health issues that limit your life expectancy as a PERS retiree and your spouse is healthy and has strong genes in their family, option 2 may maximize your benefits despite the lower monthly benefit amount.

If you are considering option 2, 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 had selected option two and make sure that amount fits within your retirement spending plan for both you and your beneficiary's lifetime. Two, talk to your spouse: Ensure they understand that the benefit under option 2 is for both your and their lifetime and that the benefit available under option 2 will be less than what is available under the single life annuity options. Three, review your beneficiary: Ensure your beneficiary information is current. Remember, you can only select one under option 2 and if updates are needed, file form 1B with PERS.

In our next video, we'll provide an overview of base option 3 and who should consider it. This is another 100 % joint survivor option but with a twist in beneficiary provisions. 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, 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 www.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.