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As a teacher in the Teacher Retirement System, we are given the option of taking a reduce annuity for the right of insuring that our beneficiary will receive 100% of our annuity upon our death. According to my calculations, it would mean 11% less in yearly income to take this option. I am curious to know if this would be better than just obtaining a life insurance for both myself and my wife. I realize that term insurance premium would incease as one gets older. We are only three years away from retirement and both contributors to TRS.
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Well, I have to say I think insurance is a bad idea for everybody except couples with small children. So let me leave that alone.

Let me compare your pension with 100% survivorship to your pension with 50% survivorship. Let's simplify and say the 100% survivorship option gives you 0.9 of the full benefit.

If you live N years and get x dollars per year while alive, then M years after your death under the 50% survivorship option the total collected is Nx + Mx/2. With the other option it's 0.9(M + N)x. These become equal when 0.1N = 0.4M, or M = N/4.

To finish the calculation you have to decide when each of you and your wife are going to die. If you are each now 62, you will live to 79.5 with 50% probability and your wife to 83. This argues slightly in favor of the 100% survivorship option. However, I've neglected investment and so on. Personally, if I were married, I'd take the larger sum up front.
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I faced that issue several years ago. In my case I also had an additional option of 50% survivor at a 5% decrease in retirement which I took. There is no straight answer. It depends on your ages, your health and upon longevity genes. But if your spouse is collecting her own pension and has other sources of income, it probably is better to not take a reduction in your pension. I also had the option of guaranteed 10 year income at a larger reduction in pension. This did not seem like a good idea since I was healthy and males in my family lived into the 90's. It is not a simple calculation if you take inflation and taxes into account along with the life style in retirement you expect.
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Of course, the best option would be to be able to roll a lump sum into an IRA, but I suppose you can't do that. There are a number of books in the library that address your problem. Ones by Ric Edelman and Suzy Orman come to mind.

You really need to go through the calculations to determine if you would come out better taking the 11% cut, or buying your own first-to-die policy using after-tax money, with a face value that can generate enough income to make up the shortfall.

Zev
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