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No. of Recommendations: 7
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,

Marco
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