Episode 35 – Beneficiary vs survivor
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Today, we’re looking at the difference between beneficiaries and survivors – a key distinction you have to have on your retirement account and while you’re working. And the general rule of thumb is that beneficiaries are for before you retire and survivors are for after you retire.
Seth
Yeah, these two terms get used sometimes interchangeably on accident or I think it’s probably more fair to people just say “beneficiary,” the person who’s going to get money from my retirement account if I pass away.
Jenny
Right.
Seth
And as you said, when you’re actively working, you’ve been contributing into the retirement plan and there’s a pot of money sitting there. And if you pass away, that’s going to go to whoever you’ve listed as your beneficiary or beneficiaries.
And I’ve seen people really stress about this, like you have to list at least one. And sometimes, if they don’t have a significant other, they don’t have children, they’ll list their parents, they’ll list their partner. And it’s something that people usually do right when they start work and then they forget about it. And it’s like 20 years later, they log into their DRS account and they see, “my gosh, I still have Betty listed as my beneficiary. And I haven’t talked to Betty in 15 years.”
And I think that’s something that we occasionally have to deal with, but not too often. Usually people will choose a spouse or a child. I think the other thing that can sometimes be reassuring for people is that the state has rules. If you don’t have a beneficiary listed, we’ll pay out somebody. You know, we’ll pay out your next of kin or your estate. We’ll follow those rules associated with the state laws.
Jenny
And again, that’s before you retire. So, this is while I’m working, like you said, there’s that pot of money that’s there. And so, if I happen to die before I retire, what’s happening with that pot of money? And so, like you said, there are these rules in place for that. But you can, like you said, list a beneficiary.
Seth
Yup. And you could list an estate or a trust or some entity or organization that that money would go to that you’ve paid into the system.
But I think the other term: “survivor” is what causes a lot of confusion. Usually when you’re retiring, one of the decisions you have to make is are you going to provide a survivor benefit for one other person?
And survivor can only be one other person. So usually, you’re talking about a spouse or a partner. And the way it works is you can choose, you can name this person at time of retirement. So, I’m going to retire. I’m going to say I’m going to name my wife as a survivor, which means if I pass away before my wife, she’ll continue to receive a pension benefit for the rest of her lifetime as well.
And a lot of times people say, “well, yeah, of course I’m going to sign up for that.” But the thing that you have to be aware of is that there’s a cost associated with it. Because DRS is going to pay out over the course of two lifetimes, or the average of two lifetimes, you will receive less money each pension check you receive.
It’ll be a smaller amount because it’s expected to last for a longer period of time. And so, I know we have a video on our website about this that helps kind of explain on average numbers. And I think where this can be really challenging for folks is the amount of that reduction is based on the age difference between the two people.
So, if the people are really close in age or your survivor is older than you, there’ll be less of a reduction to your pension. But if that person is much younger than you, the reduction can be really significant because it’s going to be paid over decades longer than if it was just during your lifetime. Once again, on average, these are all you know, based on assumptions.
We had Mitch on a recent podcast about the State Actuaries Office, and this is one of the things that team does is try to figure out on average what is going to happen. How long is the survivor going to live longer than a retiree. So, you pulled up some numbers of kind of average survivor options or survivor benefits.
And I think we should certainly talk through that as an example so people understand, hopefully what those different options are when you’re retiring, what choices you have around survivors.
Jenny
So, when you retire, you choose a benefit option. And one of those options is “single lifetime,” which means that you do not list a survivor. And so, I can see this playing out for someone where maybe both of you are receiving a pension in retirement and you both say, “Hey, when we retire, we’re both going to choose, you know, the single lifetime option. That way we both have money coming in, and when one person passes away, then that other person still has their own pension income.”
Seth
Yeah, that absolutely makes sense. And I think that that’s exactly right in that we had Bruce on a previous podcast talking about financial plans and thinking about kind of if you have another person in your retirement life trying to think about what would happen if one person dies very early, what would happen if the other person dies really early, and what happens if both of you live a really long time?
Yeah. And so trying to take all three of those scenarios kind of in consideration when you’re choosing these options. So, you mentioned the single life option. That’s option one. I think if I remember the numbers right, about two thirds of people choose that option for a number of reasons. As you mentioned, both people in a relationship might have a pension, but there’s also a lot of people who are single and they don’t necessarily have someone that they would want to provide a survivorship option for.
So, option one makes sense. There’s not another choice they need to worry about. So yeah, I’ll take option one and that just gives them their full pension. The percentage for Plan 2 members: two percent, times the number of years they work, times their average salary. That’s their base benefit. That’s option one.
Jenny
Yeah. And like it says here, this is the option that pays the highest amount of the four choices.
Seth
That’s exactly right. It’s just for your lifetime. So, it’s what you’ve earned and it’s going to be your benefit for your lifetime, but your lifetime only.
Jenny
And then with options two, three and four, it really kind of breaks it down by a percentage of how much is that survivor going to receive after you pass away. So, in option two, that survivor gets the exact same benefit that you were receiving. In option three, your survivor gets 50% of what you’d been receiving. And option four, the survivor gets 66% of what you’d been receiving.
Seth
That’s exactly right. So, the percentages are talking about how much is the survivor going to receive of what you are receiving, but the amount that you’re receiving is going to be less than option one than that full amount, because once again, we’re going to be paying over the course of two lifetimes. And so, you’re taking a little bit of a reduction, so that way your survivor is also guaranteed to receive some monthly pension after you pass away.
Jenny
Absolutely.
Seth
Sometimes people think about this sort of like in terms of a life insurance policy. “I’m reducing my pension” is like paying a monthly life insurance premium. I’m reducing the amount I am receiving, but I’m guaranteeing that whoever is listed as my survivor is going to receive that monthly amount. So that’s one way to think about this, that you’re taking that reduction to your pension to pay for that ongoing benefit.
The other thing that people aren’t always aware of is that if you select one of these survivorship options and your survivor passes away before you do, at that point going forward, your benefit goes back up to the single life option. So, you get a little bump up in your pension benefit because at that point we know we’re only going to pay it out for one lifetime. That life insurance policy is kind of expired. There’s no need for it any more.
Jenny
Interesting.
Seth
Yeah. So, I think that sometimes is reassuring to people. They feel like they’re maybe not necessarily losing out on something the other thing I would make sure people are aware of, even if you choose option one. So, if you choose option one, you’re a Plan 2 member and say, you know, you paid in contributions while you’re working, and if you would have passed away while you were working, those contributions would have went to whoever you listed as your beneficiary.
If you pass away in option one and you haven’t received, in pension payments, back all of the contributions that you paid in those remaining contributions still go to your beneficiary. I think sometimes [people] worry about, “well, what happens if I get hit by a bus a month after I retire? I’ve paid in all this money.”
The state doesn’t get to just keep that. That’s still your money. It belongs to your estate or it belongs to your beneficiary. So, I think sometimes people think about, Well, I need to provide a survivorship option to make sure someone is going to get something after I pass away.
Jenny
Interesting. Again, that pot of money that you’ve been paying into over your career. And I think it’s also important to distinguish that generally that pot of money is paid out within the first 5 to 6 years of someone’s retirement. So, if the member did pass away, say, 10 years after retirement, there’s probably not any money left over.
Seth
That’s exactly right. If someone chose option one and they lived a long, long retirement, you know, 20, 30 years, sometimes people think, oh, but there’s still money left. No, there’s not. At that point, we’re going to keep paying you.
Jenny
We’ll be paying you as long as you’re alive, but…
Seth
But once you pass away, there’s no remaining contributions that would go to a beneficiary. And so, at that point, the beneficiary doesn’t receive any funds. And that’s fine. Everything has been paid out that needs to be paid out at that time.
The other question I think that we get when people think about survivorship options is: “What if I’m in my 60’s and I’m still working, but I was going to retire and provide a survivorship option? What would happen?”
And there’s a lot of nuances here. It depends on what plan a person’s in and it depends on how long they work. But in many cases, if they are married, if they have a surviving spouse, that surviving spouse gets the option of being a beneficiary or a survivor. So, they can say, oh, I’ll take the lump sum of all the contributions that were paid in, or I’ll take that 100% survivorship option and receive a monthly benefit for the rest of my life.
So, they’ll get the choice. If they qualify for the choice, they’ll always get the refund of the contributions. But there are cases where a surviving spouse or a minor child — state law determines this — that person might get that survivorship option.
Jenny
Yeah, like in the case of somebody who becomes a widow, like you said, their spouse is 60 and they pass away like five years before they’re planning to retire. Yeah.
Seth
We sometimes see this with folks who have worked beyond 65. They’re continuing to work and they’re in their 70’s and they think, “oh my goodness, I’ve just gotten some horrible diagnosis and I need to retire, so my spouse will continue to receive a pension benefit.” And in those scenarios, we can definitely talk a person through of, well, even if they pass away while they’re actively working, will their spouse have that option for a survivor benefit?
Because you can’t declare your survivor until you’ve retired. That’s one of the key takeaways I think, for this conversation is that that’s when you make that decision. Otherwise, it’s determined by state law if a person’s going to have a survivorship option.
When you retire, you’re going to have these four choices, the first choice being just the single life option, just the single life benefit, and then the other three being survivorship options that are generally similar but slightly different depending on how much a survivor is going to receive and how much you’re going to receive while you’re while you’re working.
We have videos on our website about this, we have webinars. The other thing I would say is that a person can run a benefit estimate for themselves, kind of their own scenario, and you can put in the birth date of your survivor and it’ll show you what those reductions are.
Jenny
Yeah, absolutely. So, you can do that through your online account, log in, choose the benefit estimator and like you said, put in all of those factors of choosing the option one, two, three or four. And if I choose my survivor as my spouse or my child and what that cost difference looks like.
Seth
Yeah. The really great thing about that is that you can do that in your 30’s or 40’s and project: “What is this benefit going to look like in my 60’s?” For people who are already very close to retirement, they can run that for any number of different survivors that they could have.
Jenny
Well, I think these are all really great options and hopefully we’ve helped give our listeners a little bit of the understanding between beneficiary and survivor.
Seth
Yes. They are two separate, but semi-related things. Yeah. All right. Thanks, Jenny.
Jenny
Thank you.
[music outro]
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