Podcast Episode - Suze School: The Right Pension Option

Employee Benefits, Retirement, Taxes

July 23, 2023

Listen to Podcast Episode:

Suze School is a lesson on choosing the right joint and survivor benefit pension option for you and your spouse.  Remember to think of all the potential things that can happen after you retire.  You’ll want to make sure your spouse is provided for.

Podcast Transcript:

July 23rd, 2023 Suze O here. And you are all listening to the women and Money podcast

as well as everybody smart enough to listen. And yes, yes. Yes. We had a magnificent KT birthday a few days ago. I posted pictures on the Women and Money app. Just a few so you could see. But she had an absolutely great time and so did her sister Lynn, who's her twin sister, by the way. Can you imagine? I have two of them. Oh my God. Two KTs.

Now before we begin, Suze's school, just want to say happy birthday, Laurie Sellingmen n who I love so very, very much and also kind of like my son in a strange way, Alex Axela.

Happy birthday tomorrow. You two. Have a great one.

All right. So

this next week coming up, the feds, the committee starts to meet to decide, are they going to raise the fed funds rate or are they not their decision? Will be made on July 26th of next week at 2 p.m. east coast time. So we'll see if the FOMC has raised the short term fed funds rate as they have 10 consecutive times before. Ok.

And then we'll see what happens with the stock market and everything else. I will bet that they will raise it by 25 basis points, which means our interest rates for you may go up even higher. We shall see.

Now, KT mentioned last week on the Ask Suze and KT Anything that she loves teachers and there are so, so many teachers out there. And today, one of the occupations that still get a pension when they retire happens to be teachers. Maybe you remember years and years ago when you worked for a corporation

after 20 or 30 years of working for them and then you retired, they gave you a monthly pension and that pension was a fabulous thing to have. And then that really was replaced by 401k plans. And so therefore many people out there don't have pensions anymore because all you have are your 401k s. However many of you still do

when you do get a pension, like most teachers, do

you have options for that pension?

And the options are called Joint and Survivor benefits.

And what that means. Get out your Suze Notebook because maybe you don't get a pension, but maybe one day your kid will or your mother will or your father or whatever it may be or just a friend and they need advice. So take out your Suze notebooks because this is really a good Suze School just for all of you to know. All right,

when you get a pension, they give you options as to how do you want to take that pension

and what that means isn't. How do you want to take it weekly biweekly, whatever it means? do you want to get your full pension amount? Which means you will get X per month. But if you die, it's called a life only. If you die, your spouse will get absolutely nothing.

Or do you want to take 100% joint and survivor option where whatever you get upon your death, your spouse will get 100% of whatever you were getting. And there's all different kinds of percentages. You can get 100% joint and survivor benefit,

which again is where your spouse gets 100% of what you're getting. 75% joint. And survivor benefit, which means your spouse would get only 75% of what you were getting. 50% joint. And survivor benefit, which means your spouse would get only 50% of what you were getting

and 25% which means your spouse would only get 25% of what you were getting.

And obviously, in order to leave your spouse money after you have died, that's like an insurance policy.

So what happens is whatever you are entitled to for your full pension, your life only pension, they will pay you that every month. And again, if you die, your spouse gets nothing, they reduce the amount of money. That would be the life only option.

Depending on. Do you choose the 100% 75% 50% or 25% joint and survivor option? That's how it works. Now, obviously, if you are not married, you want to take the life only option because remember, joint and survivor benefits are only for those who are married.

And I will now read you the email that spurred this Suze School on.

Hello, Suze and KT. Thank you both for everything you do. This question is about choosing or not choosing a joint and survivor option for my spouse. When retiring, I am looking to retire next July 1st at age 66 and my wife is currently retired at age 67. Can you write these numbers down

because this is how you also think about social security and other things in life? All right. So do this with me. Learn from this. Pretend you are me and a friend has asked you this question.

How would you answer it? So, Suze school isn't just about, this is what you need to know.

Money has to be

an understanding of what you need, what you want, how you feel about it, all of that.

So you have to understand how it works.

So 66 and my wife is 67 and currently retired.

I am a teacher. So I will be entitled to a pension of about $2595 a month.

Now, remember write that down,

I said a life only option, your full pension. In this case, his name is Steve, is 2595 a month. That's what he would get. And if he took that, and by the way, the spouse always has to give permission to take anything less than 50%. Just so, you know, if he were to take that and the life only option

upon his death, his spouse gets absolutely nothing.

He goes on to say, I cannot decide whether to choose a joint and survivor option or not. The 100% joint and survivor option is $2141. Write it down, the 75% joint and survivor option is $2245.

The 50% joint and survivor option is $2361. Do you see how it's going up because you're leaving less to your spouse upon your death? And the 25% joint and survivor option would be $2481.

He goes on to say my wife does not have a pension, only Social Security.

We have about $1.2 million. In IRAs, he did not say Roth IRAs. He said IRAs which means taxable. When they go to take the money out, it will be taxable. Ok.

It's in equities and fixed income, they own their own home with no mortgage, write it down and they have no debt. He doesn't say how much the home is worth. And so we just have to assume it's a nice home. All right. He says, I feel we have enough for her to survive. Should I pass before her?

Please give me your thoughts on this. I really do need your feedback to help decide the best option. Stephen, I love that you wrote in because years ago, years ago when I was seeing clients, I also was the retirement planner for Pacific Gas and Electric, which was the utility company for Northern California.

And at one point there, they had 7000 people retire and they all came to see me and they all had to choose which joint and Survivor benefit they were going to choose. So I went through this and went through this with thousands of people over my career. So I can tell you hands down

that I want you without a shadow of a doubt to choose the 100% joint and survivor option. Now, I want all of you to listen to me.

Obviously, if Stephen chooses the 100% joint and Survivor option,

that means all Stephen is going to get is $2141 a month. They will have reduced his full pension by $454 per month. I know that in this case, that seems like a lot of money.

Why do they reduce it by so much? They reduce it? Because obviously, Steven through his work is in essence, the company is buying a life insurance policy or that's how much it will cost them to ensure the fact that they can provide Stephen's spouse with 100% every month for the rest of her life.

$2141. Now, just write those numbers down

when I was doing planning for Pacific Gas and Electric. A lot of people said to me the following and you are never ever to do this.

They said, all right, Suze, we're going to take the $2595 the full pension and we're going to buy a 20 year level term policy on me. So if I die, my spouse will be ok. Are you kidding me?

This isn't about 20 years from now and 20 years from now, Steven may be what 86 he could live easily into his nineties if he's healthy. And at the time that if his spouse is still alive, that she needs the money, the most, a 20 year level term policy goes, uh way

and the plan usually is they will take the difference from the 2595 and use it to buy a term life insurance policy to protect

the spouse.

Now, you would have to buy at least a $700,000 life insurance policy

to protect

the spouse in this situation. Why? Because $700,000 of insurance, Stephen dies, the spouse, she would invest that 700,000 and let's just say she could get 4% on that.

That's about 28,000 a year. Obviously, it will be taxable, not the 700,000, but the income from it. So after taxes and everything, that'll probably leave her about 25 or $26,000 a year to live on, which is what she would be getting with the 100% joint and survivor option.

Because remember 21 41 a month is $25,692 a year. Are you all following me?


you can't do it that way if you want to replace the $700,000 life insurance policy to guarantee your spouse will always be ok. A $700,000 life insurance policy is not just going to be four or $5000 a year. If it's a whole life policy, it is not going to be that cheap.

So you are far better off doing it where doing it through the place of employment and taking the 100% joint and survivor option. Because remember if you take the full option, the life only,

which in this case is 2595

$454 more than the 100% joint and survivor option, that $454 will be taxable to you, Stephen.

So you're not going to really have that much more, believe it or not.

That's number one. Why do I not want you to take the 75% or the 50% or the 25%? I have done this enough. Now, when one spouse survives the other, they will lose one social security check. Number one

and things can happen and every single penny matters, you step think you have a whole lot of money because you own your home outright. You have $1.2 million in an ira right now. You have it right now.

What happens if it goes down? What happens if you didn't protect it? What if it was a few years ago, a year or so ago? You died

and now your bond portfolio because you thought you were gonna protect all this money and you bought mutual funds with bonds in them and it went down 30%.

Or what happens if the stock market crashes or interest rates go down that $1.2 million doesn't mean unless you put it all in treasuries, you keep it all safe and sound

isn't really that much money if you think about it

because remember starting at the age of 73 you're under required minimum distributions and that is just seven years from now, Stephen.

And therefore you have to start taking money out of the 1.2 million and probably after taxes and everything and it will end up just being spent because of inflation and everything like that.

So that's number one, number two, your home.

When a spouse, a woman loses her husband or her wife,

normally she does not want to sell the house that they were living in. At that time,

she wants to stay in there. She doesn't want to give away your clothes. She wants the memories. It can take two years before she sells it. Now, I have been doing this long enough dealing with female spouses, male spouses that have survived their partners and I can tell you women have more of an attachment

to the house and things like that than usually the men do. It's just something that I have noticed over the 40 years that I have been dealing with things like this.

But regardless, you cannot assume

that a spouse right after you've died, everybody is just going to be able to sell the house. And what if it was 2007, 2008 when real estate had crashed

and the house that was worth $700,000 in Tampa, Florida was worth only $100,000. Now,

what if that the truth of the matter is you're not gonna buy insurance because the insurance is too expensive, whatever it may be. So, you've taken the 25 95 you didn't buy insurance

and you die the next day afterwards. Your spouse now could easily live another 30 years without that income, without that income at all.

You're not even old enough to be claiming social security at that point because you should absolutely be waiting till you're 70 to do so. But let's just say you die

and now your spouse gets to take your full social security. Your full social security doesn't really start to be the full primary amount till you're 67. I know I'm driving all of you crazy right now.

But these are the things that can happen. So how is she going to support herself? She's gonna lose her social security and probably take over yours if yours is higher than hers. But now she has lost the pension that you two were supposed to be enjoying and her social security. Are you kidding me?

So, here is the real question

if you can't do without $454 a month right now. My dear Stephen.

Are you asking her

to do without your total 2500 or $95 a month? Is that what you are asking her to do?

You absolutely can make it both of you with what you have on 21 41 a month as a pension, you can do that,

but don't ask her to do so. Do you understand what I'm saying?

Are there exceptions to what I just said? Of course, there are, if your spouse is seriously ill and she is expected to die, then possibly you could do it and take out a term insurance policy and protect her just in case something happened to you like an accident before she passed

or you can all ask your companies, do they have something called a pop up option?

And a pop up option is this, it is where you take the 100% joint and survivor option.

And if your spouse dies before you, you get to pop up to the full amount. And in this case, the 25 95

Stephen ask if they have a pop up option because chances are the STRS system or the PRES system which you are a part of as a teacher. The last I knew they had a pop up option. If they do that, then you take the 100% joint and Survivor benefit with the pop up option.

Just know with a pop-up option. It will cost you a little bit but not as much as a plain 100% joint and survivor benefit.

So those are things you need to remember.

The bottom line is this. If your spouse is totally healthy,

if they don't offer the pop up option,

I don't really care how much money you have. Because the truth of the matter is you just never know what can happen in life. I have found over all the years I have been doing this that truthfully the only way to go is the 100% joint and Survivor option

with the school district or company that you are working for. Now. I just want to say one other thing if I were in your situation

and I had the amount of money that I have today and KT had the amount of money that she has today, which is multimillions of dollars in her name.

And I was about to get a pension. I would still take the 100%

joint and survivor option. I would never ever, ever take a life only option.

All right. Now listen to me, everybody, every corporation school system, whatever it may be, they have different variations of pension options. But this Suze School today gives you a good overview of things that you should think about when choosing which option you want.

So I hope this wasn't too complicated for you.

But I know it's not because I know that you're all getting smarter and smarter. But these are the ways that I want to start training your brain to think

and to guide you into things that can happen.

So, and I know $1.2 million sounds like a lot of money. It would have been a whole lot more, by the way, Stephen, if you had had it in a Roth Ira where no taxes would be due, no required minimum distributions, no taxes to her on this money upon your death. Then maybe it would be different,

but that's not how it is.

So, before I sign off, I am so curious to see what happens on Tuesday. We should all be watching it, watch what the stock market does. Just let's see. And then we'll be able to plan what we do more for the rest of this year. So

until then today, wherever I go, come on, say it with me today. Wherever I go, I will create a more peaceful, joyful, and loving world. And if you do that, I promise you you will be unable. Bye bye.

Music (out)

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