Florida Retirement System (FRS) provides two retirement plan alternatives to the employees covered under the state pension plan. The defined benefit plan is called the FRS Pension Plan and the defined contribution plan is called the FRS Investment Plan. For retired employees in the FRS Pension Plan benefits are paid monthly with the amount based upon average income/years of service formula and the survivorship/beneficiary election that is made. For single, unmarried participants, the benefits are paid over the participants single life with a limited benefit paid to children under age 25 or a lifetime benefit for non-spouse individual, “legally dependent” upon the FRS participant. For married participants, there are four options available to plan participants which provide guaranteed lifetime income for single life, life period certain, joint life and joint life with a reduced benefit for the surviving spouse. In order to maximize the defined benefit pension election, participants must consider both life expectancy outcomes.
In some instances, FRS pension plan participants can maximize the lifetime income for married couples through a single life income payout option coupled with the purchase of a life insurance policy to insure the FRS participant’s life with the survivor spouse as the beneficiary. This “pension maximization” strategy must meet certain criteria for the decision to be suitable. First, the premium paid for the life insurance policy must be the after-tax difference between the pension incomes paid for a single life (option 1) and 100% survivor (option 3) income options. Second, the difference in after-tax monthly must used to purchase a “No-Lapse Guaranteed Life Insurance Policy” payable for life. Finally, the amount of coverage should be sufficient to replace the taxable benefit with a tax free lump sum. The insurer must be financially sound and insured must be healthy enough to meet insurance company underwriting standards.
Two Life Expectancy Retirement Scenarios
First scenario, FRS pension plan participant survives their spouse. This will result in higher lifetime income for FRS participant than had a survivorship option (option 3) been chosen. The FRS participant would own a life insurance policy with cash value to surrender, maintain, or perhaps reduce the face amount to provide a family benefit.
Second scenario, FRS pension plan participant is first-to-die. Survivor spouse replaces FRS pension income benefit with life insurance proceeds that are tax free. The total taxes paid over the survivor’s lifetime might be less due to the receipt of the tax free lump sum. Survivor can designate a beneficiary for any unused balance at their death which would not be available had a 100% survivor (option 3) income option been elected.
Pension maximization strategies can result in significant benefits to families who rely upon FRS Pension Plan benefits for their financial well being. True North Financial Advisors provides personalized financial planning and investment management services to FRS Pension Plan participants located in Boca Raton and throughout South Florida.
This is a hypothetical example for illustrative purposes only.
