Joe’s friend Carl recently told him about his decision to switch to the FRS investment plan to give him more flexibility with his income in retirement. Joe is also interested, but not so great at math, confessing that he once made a 59 on an Algebra II test in 10th grade and burned the evidence in his parents’ BBQ pit. Carl tells Joe that he’s been in the same boat and invites him to an adult education statistics seminar one night to help him make more sense of things.

At the stats seminar, Joe learns his life expectancy is *73.2 years, while his wife Pam’s is *79.1 years. The fact that she is 5 years younger than Joe makes that age discrepancy loom larger, as it might mean Pam could be making ends meet alone for a considerable length of time. Back at home, the couple start trying to crunch the numbers on what they need to do, but quickly realize they lack the proper information and insight to make much headway. Pam dreams of being the kind of grandmother who always has a warm house, a busy kitchen, and spoils her grandchildren rotten. That vision is feeling a little shaky right now.

CDC: https://www.cdc.gov/nchs/pressroom/nchs_press_releases/2022/20220831.htm

On a tip from Carl, the couple schedule an appointment with a financial professional who shows them that if Joe retires at age 62, he’ll receive $26,000 a year from his pension. If he were to switch his benefit to the investment plan, he'd get a flat payout of $450,000. With his life expectancy and an average annual rate of return of 6%, he’d jump up slightly to $27,000 per year. Additionally, to Joe’s surprise, the advisor shows him the fine print he missed out on earlier. The $26,000 pension only gets paid to Joe. It is $22,000 if he wants the benefit to go to Pam if something happens to him. Pam’s dreams of taking the grandkids to Disney World every Christmas feel like they hit a bumpier road.

This hypothetical example is for illustrative purposes only, and its results are not representative of any specific investment or mix of investments. Actual results will vary.

The advisor shows the couple that there are other options that they don’t know about that can provide additional benefits. If Joe picks the spousal benefit for Pam, retires at age 62, and lives to his life expectancy, he’ll earn $244,200. Pam then collects his pension to the end of her life expectancy and earns another $264,000. That’s a total of $508,200, which looks like almost $60,000 more than the original payout option from the investment plan. Pam is thinking maybe she could take the grandkids to Magic Kingdom every few years if they really tighten the budget.

Before Pam and Joe get gung ho on the spousal benefit, the advisor breaks down the Investment Plan. If Joe retires with the $450,000 earning 6% a year, he’ll receive $27,000 per year to his life expectancy for a total of $302,400, and Pam will receive an additional $297,000. That bumps the total up to $599,400 solely in interest income, with another $450,000 left in the tank for their beneficiaries to inherit or for other expenses. Suddenly Pam is thinking she might throw Joe a retirement party and invite Goofy, Mickey, and Minnie to attend! They’ve gone from Pam surviving on $24,000 a year to total long-term benefits exceeding $1 million. 

This hypothetical example is for illustrative purposes only, and its results are not representative of any specific investment or mix of investments. Actual results will vary.

Pam and Joe then can see that another added advantage to the investment plan is the generational wealth for Joe and Pam’s children and grandchildren. They can now see that their long-term benefits at their life expectancy can exceed $1 million, and then that same $450,000 can be inherited by their beneficiaries who can start the process all over again.

Thanks to Carl’s tip, Joe’s concerns about protecting his beneficiary and maximizing his income in retirement have been addressed. He knows that either Pam or he will be able to carry on with signific assets, regardless of which one of them passes first, while remaining optimistic that fate will grant the two of them many blissful years of retired life together. The ability to build generational wealth at the end of their lives is a remarkable gift that Joe and Pam can share with their children and grandchildren, while also helping them feel confident that they will not pose a burden to their families in their golden years by having liquid assets available if necessary. While this solution works great for Joe and Pam, it’s not the case for every FRS member. The fact is that many miss learning about this option and make permanent decisions like joining DROP, potentially leaving money on the table, or not behind to beneficiaries in the process.