Your Pension Decision Is a Family Decision
For teachers and federal workers approaching retirement, few choices carry the same weight as the pension election. It is one of the most consequential financial decisions you will ever make, and once it is locked in, it cannot be changed.
The Maryland State Retirement System gives you seven payout options to choose from. The question is not which one is objectively best. The question is which one fits your family. Federal employees face a very similar decision with their own survivor annuity elections, and the thinking that follows applies all the same.
A Quick Tour of Your Seven Options
At a high level, your choices fall into three groups.
The Basic Allowance pays you the maximum monthly benefit for your lifetime, but payments stop the day you pass away. Your beneficiaries receive nothing.
Options 1 through 4 are single life or dual life annuities that trade some of your monthly payment for varying levels of beneficiary protection. Some provide a lump sum to your heirs. Others provide ongoing income to a surviving spouse.
Options 5 and 6 add a pop-up provision. If your beneficiary passes away before you, your monthly payment increases back up to the Basic Allowance for the rest of your life. That flexibility comes at the cost of a slightly lower starting payment.
Matching the Option to Your Situation
Here is how the decision tends to come together across different family circumstances.
If you are single and no one is relying on you financially, the Basic Allowance or one of the single life annuities is often the right fit. You maximize your income while you are alive, and if you are concerned about passing away early in retirement, Option 1 or Option 4 can still leave a lump sum to your heirs.
If you are married and your spouse will need ongoing income if you pass away first, a dual life annuity is almost always the right starting point. We have sat across from couples who chose the Basic Allowance for the higher monthly check and then faced a difficult conversation years later about whether the surviving spouse could afford the continuing care community they had long planned for. The pension stopped with the first spouse, and so did that plan.
If you are married and you want coverage for your spouse while protecting your own income in case your spouse passes first, Options 5 and 6 deserve a serious look. You get survivor coverage while your spouse is living, and if they pass before you, your payment pops back up to the Basic Allowance.
There are many variables that come into play when choosing the right pension option - your age and health, your spouse’s age and health, other guaranteed income such as Social Security or a spouse’s pension, and your overall financial picture should all factor in.
Before You Sign
Ask yourself a few questions. If I chose the Basic Allowance and passed away five years into retirement, could my spouse still afford the life we planned? If my spouse passed first, would I be comfortable with a reduced payment for the rest of my life? Have I looked at Social Security, our savings, and our full income picture together, not just the pension in isolation?
Choosing your pension payout is just one piece of your full retirement puzzle. If you'd like an extra set of eyes on how your pension, Social Security, and savings fit together, you can reach out to our team here. We are happy to help you explore your options so you can make the absolute best choice for your future.