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Firefighter pension payouts: How to choose the best option

A firefighter/financial planner explains the three pension payout options and the factors to consider in the decision-making process

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When it’s time to hang up the helmet, firefighters need to make important decisions about how to receive their pension.

Photo/Matthew Broom

After decades of stretching lines and picking up granny at 3 a.m., there comes a time to hang up the helmet. As a firefighter/paramedic, I have seen some who worry about the loss of camaraderie and others who are excited to begin a new chapter of life. For the senior personnel, retirement means cashing in on their well-earned pension – but determining the best option for how to receive a pension isn’t always clear cut.

As a financial planner, I help firefighters evaluate their options. Whether to take a Straight Life Annuity, Joint and Survivor Annuity, or possibly a lump sum payout can depend on several factors.

Here we’ll review the types of payouts you may have available to you. We’ll also consider the factors that can influence your decision and tabletop an example case.

Firefighter pension payout options

There are three pension payout options:

  1. Straight Life Annuity: This option pays the pension benefit for the life of the participant with no survivor benefits.
  2. 10 years Certain and Life Annuity: Your pension benefit is guaranteed for 10 years to you or your beneficiary. Beyond the 10 years, the benefit is paid for the life of the participant with no benefits following death.
  3. Joint and Survivor Annuity: Your pension benefit will be reduced but will continue for your life and the life of your beneficiary. The beneficiary benefits range from 100% of the benefit payment down to 50%. Your monthly benefit is reduced as the survivor benefit percentage increases.

Pension payout factors to consider

There are several factors to consider when determining which pension payout option is best for you:

Marital status: If you are flying solo, this decision should be relatively easy. The straight life annuity will maximize your monthly income.

If you have an obligation to an adult child, like paying for college, the 10 years certain and life annuity could be a good option. You will get a slightly smaller monthly benefit, but your pension benefit is guaranteed for 10 years. If something happens to you before the decade is up, your beneficiary will continue to receive the monthly benefit.

This decision can be complicated if you are married. Any of the options could make sense for your situation. Which one you choose should be based on the variables to follow.

Life expectancy: Contemplating your own death can be difficult. Successful pension decisions hinge upon it, though.

If you are in poor health with a family history of heart disease and every limb on your family tree has died before age 65, the straight life annuity will probably not be the best option for you and your spouse. You’d be better off selecting a joint and survivor annuity to take care of your spouse.

On the flip side, if your spouse is considerably older than you or has a shorter life expectancy, the 10 years certain and life annuity could make sense. Your spouse is guaranteed an income for 10 years if you pass first. Beyond that, you will receive a much higher benefit versus a joint and survivor annuity option.

If both spouses are in good health with no signs of slowing down, you continue the decision-making process by considering your other income sources.

Other income sources: A strategy that is often suggested (mostly by people who sell insurance) is pension maximization. This method requires you to take the straight life annuity payout and buy life insurance to provide income to the surviving spouse. This can be a risky strategy for a number of reasons. Age-related cognitive decline happens, and if the mail piles up and premiums are missed, the money won’t be there.

If you have a sizable nest egg, you could follow a pension maximization-type strategy by self-insuring with your savings. This would allow you to take the highest payout and use your savings to sustain the surviving spouse.

If your spouse has a pension or other savings, these should also be considered. If your spouse can live comfortably off their own pension/savings, then there is reasonably no reason to elect a joint and survivor annuity.

Social security can also weigh heavily into these choices. For example, if your spouse is eligible for $1,500/month in social security benefits, you may be comfortable selecting the higher benefit of the 50% joint and survivor annuity versus the 100% option.

The sleep factor: Your life expectancy and other income sources are essential in this decision. But, if you can’t sleep at night knowing a straight life annuity won’t provide for your spouse, you need to choose another option. Your health and happiness is something we want to maximize in retirement. If selecting a joint and survivor annuity gives you peace of mind, then that is an excellent choice. Our lives aren’t math problems. So even if it’s not the best mathematical option, peace of mind and a good night’s sleep can be worth it.

Pension payout sample case

Let’s now take a look at a real-life example and see how it plays out.

Ricky is retiring after 30 years in the fire service. Ricky is 55, and his spouse, Tammy, is 53. They own their home. They are confident that they can live comfortably on about $3,000/month. Both Ricky and Tammy plan to work part-time in retirement for at least the first 5-7 years. They want to live off Ricky’s pension and use any additional income for travel and continued saving.

Ricky has about $150,000 in his 457(b), and Tammy has $100,000 in a previous employer’s 401(k). They are both in good health and expect to enjoy a long retirement. Based on period life tables, Ricky can expect to live to age 81 and Tammy to age 84.

Ricky’s pension options are as follows:

  • Straight Life Annuity: $4,096/month; Survivor Benefit: $0.00
  • 10 Years Certain and Life Annuity: $4,055/month; Survivor Benefit: $4,055/month guaranteed for first 10 years of retirement.
  • 50% Joint and Survivor Annuity: $3,891/month; Survivor Benefit: $1,945/month
  • 66% Joint and Survivor Annuity: $3,686/month; Survivor Benefit: $2,433/month
  • 75% Joint and Survivor Annuity: $3,482/month; Survivor Benefit: $2,611/month
  • 100% Joint and Survivor Annuity: $3,276.80/month; Survivor Benefit: $3,276.80/month

Which option should Ricky choose?

You could make a reasonable case for any of the options. That is why it is called personal finance.

Ricky can’t bear the thought of leaving Tammy with no income, so the straight life annuity won’t work. They both like the security a 100% Joint and Survivor Annuity offers but don’t feel that it will give them the freedom to travel.

What about the 10 Years Certain and Life Annuity?

They plan to continue investing while working part-time and project that their nest egg will grow to about $500,000 in 10 years. Since they understand the 4% safe withdrawal rate, they know that this amount alone may not sustain Tammy’s lifestyle if Ricky were to die within the 10 years. Social security survivor benefits will help but still not meet the $3,000/month lifestyle.

In the end, Ricky and Tammy choose the 50% joint and survivor annuity. This option gives them extra income above their $3,000/month expenses. Along with their part-time income, they will have plenty to meet savings goals and travel. They are both confident that, if something happened to Ricky, Tammy will live nicely off the 50% annuity, combined with their nest egg and social security benefits.

The bottom line is any of these options could make sense in different situations. You have to find a solution that works for you and your family.

Start planning for the future

A pension is a great benefit, and you earned it. Whether you are making this decision next week, next month or next decade, a successful retirement takes planning – but retirement planning and pension decisions can be confusing. Most of us would be more comfortable making tactical decisions on a fire with entrapment at 3 a.m. However, achieving a successful retirement is your responsibility and educating yourself on the tools to do so is imperative.

Matthew Broom is a firefighter/paramedic with Gwinnett County (Georgia) Fire and Emergency Services. He has been a member of the Hazardous Materials Response Team since 2016. Prior to joining the fire service, Broom graduated with a BBA in business economics from Georgia State University. In 2017, he began his Certified Financial Planner coursework at the University of Georgia. After passing the CFP exam, Broom launched Forward Focus Financial Planning to help firefighters and their families accomplish their financial goals. He is also the host of The 24/48 Podcast, which focuses on helping firefighters find success on and off the job.