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My husband and I recently received information from CalSTRS that we are eligible to change our selected benefit options, due to recent changes made at CalSTRS. The option we selected at retirement enables the spouse to receive 50% of the retirement benefit upon the member's death. We now have the opportunity to select the 75% option. My husband retired in 1999. (current age 69) I retired in 2002. (current age 64) There will be no fees for changing options. Because of our ages we will probably keep the 50% option on my benefit, which is the lesser of the two benefit amounts. Life insurance at 69 is very expensive, so the 75% option for my husband might make more sense. We do received a 2% COLA each year. I have run the numbers, but still have questions. Receiving only 50% of my husband's benefit could make it difficult to keep our house. Another factor to consider is the healthy longevity of all my family members. Assuming we can exist on 82% of my husband's benefit now, would this 75% option be a wise choice? I realize, we would basically be buying an annuity. Would it be better to pull the same amount out of his current retirement benefit and invest it in a balanced fund? Does life insurance make any sense at this age?
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Hi CalSTRSRetiree,

I work as a pension actuary, so a lot of what you asked is right up my alley. I work on private pension plans instead of government plans, but the main concepts are the same. I think that there are three major considerations here:

The first is how much of a drop in benefit is there for changing from the 50% survivor option to the 75% survivor option. Depending on the plan's factors, this change may be actuarially equivalent (basically this means that it should be a wash based on standard mortality tables and the interest rate assumed), or it may be subsidized. What is the ratio of the 50% benefit that you are currently receiving vs the 75% benefit that you would receive? If the change is subsidized, then you will be better off with the 75% option (more money is better :-)) If the change is on an actuarially equivalent basis, then you're trading a lower current benefit for a higher benefit after the first person passes away, but the expectation is that the total payout will be the same either way.

The second factor is how much of your current expenses are fixed. If your main expenses are a mortgage, CC debt, car pmts, etc., then these will still be around in the same amount while you are both alive and after one person has passed away. In this case you will probably want to pick the 75% option since you want to minimize the change in income that you are receiving. However, if most of your expenses are discretionary like travelling, dining out, or other expenses that cost twice as much for two people, then you won't need as much money when only one of you is doing the travelling and dining out. In this case the 50% option is probably better since you'll have more money coming in to enjoy while you are together.

The third factor to consider is the longevity in your family history that you mentioned. If you both expect to live long lives, then the 50% option is going to be better since you will have more time receiving a higher benefit (the pre-death 50% monthly benefit will be higher than the 75% pre-death benefit). However, if there are health issues on the horizon, then the 75% option may serve you better.

As for life insurance, I think that the most you would want is enough to pay off any outstanding mortgage amount. The real use for life insurance is to replace income for a primary wage earner, and since you are both retired this is not an issue. The cost is very high, and the benefit is fairly limited. I would steer clear of the life insurance at your age unless it is the only realistic way to pay off a mortgage if one of you passes away.

Please post back with any questions.

Foolish best,

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I'm a bit confused. Usually, once you select the survivorship option at retirement, it is fixed. It sounds like CalSTRS is allowing a one time retroactive change...something I've never heard of. But assuming they are, will they require that you (or your husband) repay the excess pension payments you (he) recieved with the 50% survivorship option?

And funding a survivorship with a cash-value life policy is potentially a good alternative, as Governments sometimes aren't the most efficient money managers and may charge excessively for a survivorship (as is the case with the Federal Survivor Benefit Plan...or at least it was when I retired from the military in 1999). And sure, depending on your health, you can buy cash-value insurance at any age, although premiums will grow exponentially with increasing age. But this is an alternative I would explore.

But to definitively answer your question, you'll need to do a household cash-flow analysis of the fixed, non-discretionary costs that a survivor would have were the spouse to die first, and then take the option that will best meet this. Make sure to grow these expensees over time, with higher inflation used in medical expenses.

An idea might be to take your numbers to a local Fee-Only CPA or CFP, and have them double check them and help advise you. It'll cost you a few hundred bucks (like taking your car in for a repair), but may well be worth it.

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Hi CalSTRSretiree,

You've already gotten good advice, but I'll add my 2¢. It sounds like it you change your husband's election, the benefit drops to 82% of current. So, for every $1,000 of current benefit, you'll drop it to $820 for the 75% option. Upon your husband's death, the 50% option gives you $500 and the 75% option gives you $615. So, you'll get an additional $115 if you switch.

Now, let's say you opt to not change and instead you invest $115 each month at 5%. Let's say your husband lives for another 5 years. You would be able to generate a $115 income stream for 6.67 years to make both options equivalent. If you invested the full difference of $180, you would get the income stream for 12 years.

Your situation is a little more complex because you receive a COLA. This means you'll be able to invest more, but your draw downs after your husband's death will be higher, but not necessarily at the same savings rate. Let's say you capped the withdrawals at the final savings rate. You could go for 6.5 years to equivalent. If you invested the $180 difference you could go 11.25 years.

So, switching options may not be in your best interests. You may be able to do just as well yourselves if you can make the savings and invest at a good rate. Of course, there are many variables that will greatly affect the analysis. If your husband lives longer or shorter is probably the biggest factor. Your future expenses are a big factor. The savings/investment return rate is a smaller factor. Hopefully, your husband will live much longer and your expenses will go down (mortgage paid off).

Oh, and thanks for bringing up the question. I've always thought to go with the 75% option when I retire, but now I need to analyze the 50% option.

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