With this first column of 2015, we wish you a healthful and happy new year.

For any of you nearing retirement, one item that will be covered in your final pension consultation is an estimate of the monthly retirement allowance you will receive under various payment options.

Maximum retirement allowance

This form of retirement allowance provides the highest amount you can collect in retirement. It is paid to you for your entire lifetime after retirement but without any provisions for any benefit to dependents, heirs or beneficiaries after you die. Should you pass away soon after retirement, all obligations of the Teachers’ Retirement System end (except for the death benefit for retirees in Tiers II, III and IV, discussed below).

The maximum allowance might be appropriate for you if you have no dependents or if you have provided for dependents, beneficiaries or heirs in some manner other than through the TRS, such as with a life insurance policy.

Options in lieu of the maximum retirement allowance

Should you choose to provide for dependents, beneficiaries or heirs through the TRS, you can choose an option that reduces the amount of the monthly retirement allowance but includes benefits for dependents, beneficiaries or heirs. There are three major options:

Continuing payment or joint-survivor option: This option, available to retirees of all pension tiers, provides benefits during two lifetimes: yours and that of a single beneficiary. Should you die before your beneficiary, a benefit will continue to be paid to your beneficiary for the rest of his or her lifetime.

This type of option is generally but not necessarily used to provide for a spouse or dependent. You could use it to protect another person.

The retirement allowance paid to the beneficiary can be equal to or less than what the retiree had collected. The greater the benefit for the beneficiary, the higher the cost of this option.

The cost — the amount by which your monthly retirement allowance would be reduced — depends on the ages or life expectancies of both you and your beneficiary. The cost to protect a beneficiary older than you, the retiree, is much lower than the cost to protect a person younger than you. The selection of this option and the choice of a beneficiary under it cannot be changed after 30 days of the retirement date.

At an extra cost, a provision may be added so that if your beneficiary passes away before you do, the amount of retirement allowance that you receive would pop up to the maximum. This variation is known as a continuing option or a joint-continuing payment survivor option with a pop-up provision.

Guaranteed number of payments or term-certain option: This option, also available to retirees of all pension tiers, reduces the amount of the monthly retirement allowance but guarantees its payment for either five years (60 months) or 10 years (120 months).

Should you pass away before collecting the benefit for the guaranteed period of time, your beneficiary will collect for the remainder of the period. The cost of this option depends on your age and the length of the guarantee. Your beneficiary may be of any age, and you may change your designated beneficiary at any time.

Insuring a lump sum of retirement dollars: Another option available only to retirees in Tiers I and II allows you to insure a lump sum of dollars equal to or less than either the amount that you contributed to the TRS or which you are expected to collect over your lifetime. The cost depends on your age at retirement and the number of dollars you elect to insure. You can name more than one beneficiary and can change your designated beneficiary at any time.

Your decision on whether to take the maximum retirement allowance or an option is important and generally irrevocable. You should discuss the question with your spouse or significant other and your pension consultant, and you should consider your personal circumstances, including:

• your complete financial situation, including your total assets and liabilities;
• your beneficiary’s financial dependence on you and his or her ability to manage money;
• future Social Security benefits due to you and your beneficiary;
• your health and the health of your beneficiary;
• the standard of living that you and your beneficiary wish to maintain in retirement; and
• the amount of assistance in managing money that you and your beneficiary need.

The latest statistics, for members who retired in the fiscal year that ended in June 2014, show that among Tier I and II retirees, about 64 percent selected the maximum retirement allowance, about 33 percent took joint-survivor options (including pop-ups) and about 3 percent took term-certain or lump-sum options. Among Tier III and IV retirees, about 69 percent took the maximum, 30 percent took joint-survivor (including pop-up) and fewer than 2 percent took term-certain options.

Death benefit

Retirees in Tiers II, III and IV are entitled to a death benefit for their heirs or beneficiaries regardless of whether they choose the maximum retirement allowance or an option. The amount of the benefit depends on the length of time from retirement to death. If a retiree passes away in:

• the first year of retirement, the benefit is 50 percent of the death benefit that was in force on the retirement date;
• the second year of retirement, the benefit is 25 percent of the death benefit in force on the retirement date;
• the third year of retirement or later, the benefit is 10 percent of the death benefit in force when the retiree was age 60 (or, if the member retired before age 60, the benefit is 10 percent of the benefit that was in force on the member’s retirement date).

You may wish to consult a knowledgeable tax professional or estate attorney to decide the wisest manner of incorporating your TRS death benefit into your estate planning. You also may wish to consider the benefit when considering your life insurance needs.

Remember to check that your designation of beneficiary forms are up to date. If they are not, file new forms immediately. You may designate new beneficiaries online, but must set up a username and password to do so.

In future columns we will discuss disability retirement, the Tax-Deferred Annuity and loans from the retirement system accounts.