You have to make some tough choices as you close out your career as a special risk employee in the Florida Retirement System. One of those choices is determining which FRS pension option is best. Another is whether you want to participate in the Deferred Retirement Option Program (DROP).
DROP allows you to continue working while accruing monthly benefits. Ultimately, your Florida DROP payout will be a lump sum that you can invest or spend accordingly.
As far as your FRS pension plan, determining which option will help you maximize your retirement benefit depends on several factors, such as your life expectancy, the number of years you plan to spend in retirement—and your marital status.
Which Retirement Benefit Is Best for Married FRS Members?
Married FRS employees often hear the advice to choose Option 1 among the FRS pension options. The payments end once you die, so your surviving spouse would not continue receiving a benefit. However, Option 1 does offer the highest monthly payout, making it attractive.
With that higher monthly amount, the thinking goes, you can buy a life insurance policy. If you pass before your spouse, they will receive a payout from the life insurance company. From there, your spouse could purchase an annuity or invest the money.
This may sound like a good plan, and insurance companies can make it seem like the best way to maximize your FRS retirement benefits. But keep in mind that life insurance agents are running a business and aren’t necessarily out to get you the best deal possible.
Issues with Choosing FRS Pension Option 1
Although your FRS monthly payment would be the highest with Option 1, it is not necessarily the best option for you and your family. For one, we often see retirees end up choosing a life insurance policy that isn’t large enough for their needs. Plus, you have to factor in issues such as inflation, expected investment returns, and life expectancy to figure out whether your spouse would be better off with an insurance payout vs. the FRS payments.
On top of these issues, consider how a life insurance agent gets a commission for selling you a policy, which can create conflicts of interest, and the fact that life insurance companies exist to earn a profit. That may be understandable, but it also means your best interests can fall through the cracks.
That’s why we believe you should not depend solely on the life insurance agent’s presentation. You should always have an unbiased, objective party review any policies before you commit.
Alternatives to Choosing Option 1
When you’re considering the amount of your FRS monthly payment, Option 1 might look appealing since it’s the highest amount, but choosing another FRS retirement option such as Option 3 or 4 could work out better in the long run. Although these options reduce your monthly payments, your spouse would continue to receive benefits if you passed away first.
When determining the difference between payouts, the Florida Retirement System (FRS) uses mortality tables to account for factors like life expectancy, just as insurance companies do. Yet insurance companies need to be profitable, so they’re more likely to leverage the mortality table so that it’s favorable to them, not you. The state doesn’t do that.
Should You Consider a Lump Sum FRS Payment?
In theory, taking monthly payments and using a life insurance payout via FRS pension Option 1 may sound secure, but think about what happens when you pass. Your spouse would be left with a lump-sum life insurance payout while the FRS monthly payments stop. Then, at a time when your spouse is distraught and perhaps overly risk-averse, they would then have to make a major financial decision in shopping for an annuity or other ways to invest the money. Basically, at this point, you would have forced your spouse into a lump sum scenario, which is probably what you were trying to avoid by being in the pension plan (as opposed to the investment plan) in the first place.
See Which FRS Pension Option Works Best for You
Determining which FRS retirement option works best for you can be tricky, but speaking with a fee-only financial advisor who puts your best interests first can help you figure out how to maximize your benefits. As a fee-only fiduciary planner in Plantation, FL, with expertise in helping FRS special risk employees, we can provide objective guidance you’re looking for.
Schedule a complimentary consultation to discuss your pension options in more detail. We offer a free Second Opinion Service to help you determine whether you are on the right track. And if you’d like more information on your retirement options, contact us for a free copy of A Public Safety Officer’s Guide to the Florida Retirement System from Retired Battalion Chief Gary Gonzalez.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.