By Allen Giese, ChFC®, CLU®, ChSNC®
Transcript:
Hey folks, thanks for tuning in. I’m Allen Giese, founding partner and President of Northstar Financial Planners, your FRS Special Risk wealth manager.
If you’re married and are considering choosing Option number 1 for your FRS pension then I don’t have to tell you that this is a huge decision. A decision that all too often we see special risk FRS participants make without really understanding the ramification of what they are doing. Imagine making a mistake that costs your family, the people you love and care for the most, A LOT of money. Like the kind of money that could change the course of their life… and not in a good way! Choosing Option 1 and not really understanding it can be that kind of mistake. Don’t take this one lightly.
About 15 years ago one of my closest friends brought to me his entire FRS retirement plan to review, including his Pension choices. Now he also shared with me the advice he was getting, relative to picking pension options, from his peers in the fire station and the life insurance salespeople out there. When I saw how poor that advice was I realized that we could make a real difference for so many FRS Special Risk families. Because of my friends experience and my 29 years as a financial planner, our passion here at Northstar is helping Special Risk FRS participants make better decisions with their finances and better achieve what is most important to them.
So in this short video, over the next 10 minutes, I’m going to explain the 3 things you need to know BEFORE you make that pension election into Option #1.
The first think you must understand is that this is one of those decisions that once you make it, you can’t change it. As soon as that first payment is made into your DROP or directly to you that’s it. You’re living with it for the rest of your life and your spouse is living with if for the rest of theirs as well.
So what are we talking about here? What is Option 1 and why do special risk retiree’s even consider choosing it over the other choices?
Option 1 is the choice that basically says your pension benefit is tied to your life and nobody elses. So when you die, so does your pension. Even if you’re married. But because of that, you get more each pension check under option 1 than the other options. And it makes sense because the Florida Retirement System isn’t expected to make as many payments on just one life expectancy as opposed to two. If you want to know more about the different pension options, we talk about them in more depth in our book: A Public Safety Officers Guide to the Florida Retirement System, which we’ll mail to you FREE if you are a Special Risk FRS participant.
So it’s kinda tempting, right? Option one maybe pays let’s say, $8,000 per month while option 3, which pays a monthly benefit as long as either of you are alive, pays $7,000. In that example, that’s a thousand dollars a month difference… ya gotta look into that! For an extra grand a month I can think of a whole lotta extra stuff I could do each month. Now keep in mind every case is different and it depends on your ages, your work history and all sorts of other stuff… so you definitely want to get your own quote before you even begin to make any kind of decision on this.
So the reason we see people even entertaining the idea of picking option 1, even if they are married, is pure and simple… it’s that higher monthly benefit and it seems like it just might be more money to you. If you live long enough.
But it’s just not that simple… like a lot of this stuff. And I can’t even begin to tell you how many firefighters and police officer’s I’ve spoken to, after the fact, that went forward with a choice of option 1 without really looking at it and understanding it… until it was too late.
Don’t be like them. This is a perfect example of where our free second opinion service can make a difference in your life. I’ll talk about that at the end of this video.
The second point I want to make is, Beware the life insurance salesperson.
So, the workaround or strategy that folks use to pick Option 1 and still be able to provide for their spouse is pretty simple. Just use some of that difference in extra monthly income each month to go buy a big life insurance policy that in the event you died, that policy would be enough to take care of your spouse, who just lost the monthly stream of regular income from your FRS pension… because you picked Option 1.
And you know what? On paper, it kinda works. Almost, if you do everything right. I’ll let you in on a secret from my days as a life insurance agent over 20 years ago. This is a sales strategy life insurance agents are taught and it’s called “Pension Maximization.” At least it used to be called that. Maximization? Hardly. Nice name but in real life and 29 years of experience I now know there are two major flaws with it.
The first is pretty logical. Think about this for a second. When you pick Option 3 that pays a continuing benefit to your spouse aren’t you really, in effect buying life insurance? You are. And FRS has priced that difference in benefit each month, which you could say is the premium for that life insurance, based on known, published mortality rates. The same mortality rates life insurance companies use!
But what’s the biggest difference between a life insurance company and FRS? One is trying to make money off of you and has to price in a profit on top of that mortality, and one isn’t trying to make money off of you. And if you need help here the one trying to profit off of you is the life insurance company.
So in effect, picking option 3 is buying life insurance from the FRS at about as good a deal as you are ever going to find… and you don’t have to qualify for it by taking any sort of physical or medical.
So it’s simply not logical that if the quote you are getting from your life insurance agent is less than the amount of the difference, something is inherently different in the assumptions! And the assumptions are many. How long you are going to live, how long your spouse will live and what return you will get on the money that’s invested. And remember, you’re competing with the investments the life insurer has and if you are assuming you’ll do better than them you are one optimistic person!
We review these for folks from time to time when we are giving FRS Special Risk participants a free second opinion. I’m going to tell you that we almost always find the flaw… or the assumption that maybe the life insurance agent tweaked a bit in his or her favor to make the quote look a little better and get that sale. Remember… the life insurance agent doesn’t get paid unless you buy a policy. So there’s a big incentive for the agent to show you that the amount of insurance you need costs less each month than the difference between option 1 and option 3… or option 4. Even if it defies logic that it should.
The third thing you have to consider before picking option 1 goes all the way back to the decision you made to stay in the pension in the first choice… as opposed to taking the Investment Plan.
Now this one comes from real life practical experience… watching the widow of a couple who had picked Option 1 with life insurance actually deal with the loss of her husband and that pension check that was automatically deposited each month in their checking account. Both of those things got cut off at the same time. And it wasn’t what you’d expect that was the problem… it wasn’t the amount of life insurance was too little or that the earnings assumption on the life insurance proceeds were figured incorrectly or anything else technical.
It was the fact that she didn’t want to be in the Investment Plan. Do you get it? She was now in the investment plan! The income for the rest of her life, and how well she does, was dependent on how well she does with her investments. And she never wanted that. If she had they would have gone to the Investment Plan from the beginning!
So by picking Option 1 that couple forced whoever the survivor was going to be, and in this case it was her, they forced her into an Investment Plan like scenario. At what turned out to be one of the worst times of her life. She just lost the man she’d been married to nearly all of her adult life. She was distraught. She didn’t want to think about investing, or making decisions on investments or anything else. If there’s one thing I’ve learned is that people don’t make good decisions when they are distraught. They become prey to salespeople all too often.
And one last thing… if you’re life insurance agent starts talking to you at this point about using an annuity to provide that income then you are completely missing the point. There is no better annuity that will be more favorable to you and your surviving spouse than what the FRS is already offering you. Go back and re-watch point number 2 on that one. If the annuity is coming from a life insurance company they are there to profit off of you. Buyer beware.
We get a lot of questions from viewers and FRS participants that call us. But the number one question we get is if we have some way just to review or offer a second opinion on what they are doing. And we do. It’s called, not surprisingly, our free Second Opinion Service and here’s how it works. We’ll meet initially to talk about what’s important to you, what you want and where you are now. We’ll look to see if there are any gaps and give you our ideas on how to fill those. After those two meetings one of three things is going to happen. One, you might see how working with us would add some value to your life and we’ll talk about how we might be able to help you and what that costs. Two, you could be in excellent shape and there’s really nothing or not much we can help you with so we’ll tell you to just stay the course… you’re doing fine on your own and obviously don’t need us. Or three, you might need some help but we’re not the right place to help you. If that’s the case we promise to point you in the direction for the help you need and send you there.
In any case, you’re going to come out benefitting. Why do we do it? Because even if we can’t help you beyond the second opinion, if we treat you right and are honest and up front you will remember that and my guess is that you’ll run into someone who needs our help more than you do. We actually get a lot of our clients that way.
Let me finish this with a quick story. I noticed something was wrong with my pool the other day. It appeared like water was coming out of only one of the jets. Now I’m not the most mechanically inclined guy around but I guessed something was wrong with my pump… so I went over to the side of the house and turned it off. I stood there for a few minutes, looking at the parts and created all these horrible expensive scenarios in my head and wondered what I should do. Should I start taking it apart, should I knock on my neighbor’s door because he’s a lot smarter about this stuff than I am? But I came to my senses and called my pool guy. Turns out in the end it was a $12 part and super easy for him to fix.
But here’s what I know to be true and what I was reminded of that day. When we seek out the best, highest professional level of advice it typically works out in our favor. I mean, can you imagine the damage I would have caused by messing around with that equipment myself? Asking someone who lives and breathes this stuff got me the right answer and probably saved me a lot of money… and certainly a lot of aggravation.
Our passion here at Northstar is helping FRS Special Risk folks make better decisions with their finances. It’s what we do.
Thanks for watching and thanks for liking this video … when you like it you are helping other FRS participants by guiding them to it. And that’s a good thing.
Thanks for all you do and keep staying safe.
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