One of the best parts of my job is getting to work with members at Pre-Retirement Seminars. It is an exciting time in members’ lives as they begin to think about transitioning from their careers into a long-awaited, hard-earned retirement. But such a transition is not without a few major decisions, one of which is selecting a LAGERS payout option. Like many decisions you will have to make as you begin your retirement journey, choosing a payout options is an extremely important one, especially since it cannot be changed down the road. It’s only natural then, that many of our members’ top question as they file into the seminar room is ‘how do I know which is the best payout option for me.’
Here’s the tricky part; there is no one-size-fits-all better option. The good news is that there probably is an option or two that is better for your individual situation and having a simple understanding of how each of LAGERS payouts work will help you make an informed decision. I think it’s part of our very human nature that we would naturally gravitate toward the biggest number on the benefit estimate. After all, who wouldn’t want to get the absolute most out their benefit? For some electing the highest monthly benefit a member could receive is a great choice, but for others, it might not accomplish what they need in retirement. Here’s why:
Keep in mind that all of LAGERS payout options are designed to pay an equal amount between you and (with some options) a beneficiary over a lifetime(s), the difference between options is who gets how much for how long. There are four payout options in LAGERS: Life, A, B, and C. While the Life Option will pay the highest monthly benefit to the member, when the member passes away, there is no other monthly benefit payable. If you have a spouse that relies on your monthly pension income, it is important to understand that when you die under the Life Option, the payments stop.
Option A and B are two options that are good for both you and your spouses’ lifetime. The member takes a reduced monthly benefit and in turn has the guarantee that his or her spouse will continue to receive a portion of the monthly benefit for their lifetime when the member dies. If you want to leave some of your LAGERS’ guaranteed payments to a spouse, these are both great options. Again keep in mind that everyone’s situation is a little different. For example, even though I am married, my husband also has guaranteed retirement income through his employer, so I may opt to take an unreduced Life option without a lifetime payout for him because he has his own retirement benefits.
Option C is the fourth payout option and it guarantees that should you pass away before receiving 10 years’ worth of payments, you can name a beneficiary who will receive payments for the remaining time in the ten year guarantee. Of course if you live beyond 10 years, you would continue to receive payments for as long as you live, but no further benefit would be payable upon your death. I’ve had members tell me that they chose this option because the thought of electing the Life Option and then possibly dying 6 months into retirement and not having anything else payable gave them heartburn. Whatever your reason, again remember that this is one more option to give you maximum flexibility in choosing a payout that is right for you.
As if all that wasn’t enough to think about, here’s one more wrinkle for you; you can add a Partial Lump Sum payment (PLUS) to any of the four options. Again, deciding if this is a right option for you is individual. If you are truly looking to get the absolute most money out of LAGERS, deciding to take the PLUS comes down to how long you think you are going to live. For most, there is a ‘break even’ point somewhere between 12-15 years into retirement. If you think you won’t make it to your breakeven point, you will receive more money by taking the PLUS because you are getting a lump sum payment upfront. If you think you are going live beyond the breakeven point, you are better off (if we are just counting dollars) not taking the PLUS since by taking the PLUS, you reduce your lifetime monthly payment. By not taking the PLUS, your monthly payments will be greater and will add up quicker over a long retirement. For many members, however, the decision to take the PLUS is not just about figuring out how to get the most from LAGERS. For example, using the PLUS to pay off a mortgage, purchase life insurance, or leave a legacy to children or grandchildren are just a few examples of reasons to take the PLUS, regardless of how long you think you will live.
There are so many decisions to think about as you approach retirement. Make sure you take time to sit down and evaluate your individual circumstances, goals, and expectations for retirement, and don’t forget that LAGERS benefit specialists are available to walk you through your options, so don’t be shy when it comes to asking questions. And above all else, remember that just because it’s the biggest number on the page, or just because it’s the most popular option among your friends, doesn’t mean that it’s automatically the right choice for you too.