FRS Pension Option 2 — Decreasing Benefit with increasing cost
The second FRS pension option is often the most misunderstood.
FRS pension option 2 is for the participant’s lifetime, and a 10-year (120 month) guaranteed payout from the day they retire.
The confusion on this option comes from when the 10-years starts. The most common misconception is that the 120 months starts when they exit D.R.O.P., because that’s when the participant separates from service. That is not when the 120 months starts. The 120 months starts the first month a pension check goes into the D.R.O.P. program or to you. Entering D.R.O.P. IS retiring from the FRS.
One of the nice things about Option 2 is that you can leave the money to whomever you’d like. It’s the only monthly pension benefit with the FRS which is not a spousal benefit. Option 2 is also the only FRS Pension option that declines in coverage but increases in cost.
Increased cost: Let’s say that Option 2 is a decrease of $100 in your pension from Option 1 when you retire. If your cost of living adjustment (COLA) is 3%, then your cost of Option 2 the next year will be $103 because you would’ve earned a COLA on that $100 reduction.
Decreased benefit: For every month you live past your retirement date the benefit to your beneficiary decreases. Example: If your pension is $1,000 per month and you don’t have a cost of living adjustment, the maximum benefit to your beneficiary is $120,000 if you died immediately ($1,000 x 120 months = $120,000 benefit). In this scenario, every month you live will decrease the death benefit amount. If you live 119 months, then your beneficiary will only inherit $1,000.
If you’re healthy and like the concept of a 10-year benefit, I highly recommend looking at a 10-year term policy. The premiums will be equal for those 10 years, as opposed to the increasing cost of Option 2, and the benefit is level as well. If you pass away 1 day before the policy lapses then your beneficiary gets the full death benefit. If you outlive the 10 years you do not owe any more premiums, unlike Option 2 where your premiums last as long as you collect a pension.