Q:
I'm about to retire and start receiving pension benefits. Should I elect a single life annuity or a joint and survivor annuity?
Answer:
First, make sure you understand the difference between the two. With a single life annuity, you receive pension benefits for life, then all benefits stop when you die. With a joint and survivor annuity, you receive reduced benefits for life, and then your spouse receives "survivor" benefits for life after you die. These survivor benefits are typically a percentage (e.g., 50, 75, or 100 percent) of the benefits you received prior to death.
Choosing between these payout options can sometimes be a no-brainer. Since the joint and survivor annuity is designed to provide for a surviving spouse, it's usually not an option if you're single. And if you're married, you typically can't elect a single life annuity unless your spouse agrees to waive the joint and survivor annuity. Keep in mind, too, that a single life annuity makes distributions only until you die, and therefore provides no benefits for your surviving spouse.
That's why even if your spouse agrees to waive his or her right to a joint and survivor annuity, the joint and survivor option may still be the best choice if you want to be certain your spouse will be taken care of. The joint and survivor annuity can be especially attractive if choosing this option will also entitle your spouse to other benefits, such as health insurance. Furthermore, it may not even be a problem if the joint and survivor annuity will pay you smaller benefits during your life if you have other sources of income.
But if smaller benefits will result in an income shortfall, you may be better off choosing the single life annuity to maximize your pension benefits. To make up for the lack of survivor benefits, there are several ways you can protect your spouse. You can leave your spouse assets that he or she can draw on for income. Or, if such assets won't be enough to meet your spouse's needs, you can buy life insurance. Your surviving spouse will then receive insurance proceeds that can be used to provide an adequate income stream. When available, you may also choose a settlement option known as lifetime with period-certain guarantee. In this case, you receive annuity payments for a specified number of years. If you die during this period, then your spouse (as beneficiary) would receive the payments for the remainder of the period.
The best strategy for you depends largely on your individual circumstances. Don't elect either a single life annuity or a joint and survivor annuity until you've talked with your professional advisors.