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In our prior post, we discussed why it’s important that you and your spouse plan ahead when making your pension election with FirstEnergy.
Depending on your hire date, there could be over 20 different options to choose from.
It’s important to make sure you’re taking into account a number of different factors, but the main ones being maximizing your lifetime income while also providing for your spouse if you were to predecease him/her.
In this post, we’ll cover how the difference in income options can be the difference of a million dollars (or more) for an average couple.
We take a look at an individual who we recently worked with and show the math behind this decision and where the planning can drastically alter both the retiring employee’s retirement, and the legacy she could leave behind for her spouse and children.
The Facts of the Case Study
The employee we helped came to us with the hope of better understanding the FirstEnergy pension benefit options available to her and her spouse.
It’s important to understand this decision is best made when considering factors such as:
- The employee age & health
- Her spouse’s age & health,
- Her retirement savings,
- Her spouse’s retirement savings,
- Their Social Security benefits,
- If she and/or her husband planned to continue making any income after retirement from FirstEnergy.
They also needed to factor in any health insurance costs they could incur if she were to retire early.
The purpose of this post is to show the differences in lifetime income, so while we’ll focus on that for this post. It’s important to understand there are a number of factors at play when making this decision.
The pension benefit options are assumed based on the following information:
- Female employee, A64 in excellent health and looking to retire at A64.
- Male spouse, A63 in good health and working but considering retirement at or near A65.
- Female employee has worked at FirstEnergy with 38 years of service, recently making about $100k/year without a bonus.
Employee Benefit Projections
Based on the A64 retirement for the employee, her projections showed as follows:
Assuming the employee does not choose a “Life Certain” option, the difference between the single life annuity and the 100% Joint & Survivor Annuity is just over $770/m.
For a retired couple, this does represent a significant monthly income difference.
However, when we consider this decision is a lifetime income option, the numbers become even more significant.
FirstEnergy Pension Option Differences Projected to Life Expectancy
Considering the employee would be making this decision at A64, we can assume her retirement date as such.
When applying these factors into a longevity illustrator, we were able to determine there is a greater than 50% likelihood of her life expectancy being A89, which would mean a 25 year retirement.
Suddenly, the $770/m difference becomes even more significant.
If we just consider that number alone, we are looking at a difference of $231,000 between the maximum single life annuity and the 100% J&S option.
The longevity illustrator gives her a 34% to have a 30 year retirement, reaching age 94, and that difference is $277,200.
However, this decision becomes especially apparent when considering the potential for growth of these figures in retirement.
By using a future value calculator, we can consider an 8% growth of the difference in monthly income.
As you can see in the figures below, it’s not inconceivable to call this a million dollar decision.
At 25 years, you’ve eclipsed the $700k mark.
At 30 years, this retired employee has eclipsed the $1.1M mark.
The Importance of Planning to Make this Possible
Whether it be a $250k or $1M difference over a lifetime, this decision is a significant one.
While we can see clearly the benefit of choosing the higher amount, we don’t want to neglect why some employees may choose a different option.
As previously mentioned, there are a number of factors to consider when making this decision, and it’s worth stress testing this decision with either scenario.
Is your spouse prepared to take this option, understanding you as the employee may pass away early in retirement? What if your spouse lives 30 years, and you only live 1 year into retirement?
This is where the planning becomes critical. In order to enjoy the benefits of the maximum pension benefit option, you must test all scenarios.
Additional Disclosures of Your FirstEnergy Pension
Despite the figures shown above, this post is not meant to be a recommendation.
Specifically, you should be fully aware of the implications of this decision.
It is rare that we recommend a single life annuity for an individual who is married and whose spouse may rely on their pension income.
Working with your spouse to maximize your income in retirement includes numerous tactics within a strategy at large.
Social Security election for both spouses additionally plays a substantial role in a retirement income strategy. A 401(k) withdrawal strategy is also to be considered.
Before you consider what pension election option you are choosing, you should be fully aware of all options and the implications.
Planning your retirement income strategy can allow you to maximize your income, while maintaining security for a surviving spouse.
Additional Resources
If you haven’t already done so, you should use the online FirstEnergy Your Pension Resource Tool to run retirement projections to better understand the impact of your choices.
Additionally, we’ve created a guide to help you avoid the 5 most common mistakes when planning your FirstEnergy retirement. We also have a recorded webinar which goes through the ways to best plan and avoid these mistakes.
If you’re ready to begin planning for your FirstEnergy retirement, we welcome you to begin the process by getting your free financial assessment. By working with a team of professionals who understand both the FirstEnergy pension system and your goals and desires for retirement, you can rest easy knowing your retirement is secure.