The 10-Year Certain Beneficiary Option: A Misunderstood Gem for FDNY Retirees
When FDNY retirees receive their pension finalization letter, the 10-Year Certain option is listed as one of the seven beneficiary options available. Yet, surprisingly, it remains untouched. This article explores the 10-Year Certain Option, its unique features, and how it can address the needs of FDNY retirees seeking a balance between cost and security.
Overview of Beneficiary Options
The finalization letter beneficiary options available to FDNY retirees include:
5-Year Certain
10-Year Certain
Option 2 (100%)
Option 3 (50%)
Option 4.2 (Option 2 with pop-up)
Option 4.3 (Option 3 with pop-up)
Option 4 Lump Sum
Despite being available as one of these choices, the 10-Year Certain Option has not been selected by any of the 16,120 FDNY retirees listed in the Fire Pension Fund's 2023 Annual Report. Among retirees, 89.6% opted for the maximum pension, while 10.4% selected one of the beneficiary options. None, however, chose the 10-Year Certain. Why is that?
What Is the 10-Year Certain Beneficiary Option?
The 10-Year Certain Option guarantees full pension payments to a designated beneficiary for 10 years after retirement if the retiree passes away during that period. Here are its key features:
Reduced Pension: Retirees accept a modest, permanent reduction in their pension.
Time-Limited Protection: If the retiree survives beyond 10 years, the beneficiary protection ends, though the pension reduction remains in effect.
Beneficiary Flexibility: Unlike traditional survivor options, payments can continue to a secondary beneficiary or the retiree's estate if the primary beneficiary passes away within the 10-year period.
This flexibility makes it “certain” that someone will receive payments for 10 years, setting it apart from the 50% and 100% Survivor Options, which only cover one beneficiary for their lifetime.
Why Is the 10-Year Certain Misunderstood?
The lack of uptake is not a reflection of the option’s value but rather its misrepresentation and misunderstanding. Common reasons include:
Complexity: The mechanics of the option are not well understood.
Herding Bias: Many retirees only consider familiar options like the 50% or 100% Survivor Options compared to the maximum pension
Perception of Limited Coverage: The 10-year duration may seem less protective compared to lifetime benefits.
Pension Reduction After 10 Years: Retirees dislike the idea of ongoing reductions without active beneficiary coverage.
For retirees in certain situations, however, this option can provide robust protection at a significantly lower cost than lifetime survivor benefits.
Why the 10-Year Certain Option Deserves a Closer Look
This option shines because it balances affordability and security. Around 50% of a pension’s present value is typically collected during the first 10 years of retirement, making this period the most critical to protect. Let’s examine two case studies to illustrate its advantages.
Case Study: Retired Captain with a $1.5 Million Term Life Insurance Policy
A 50-year-old retired FDNY captain has a pension with a present value (PV) of $3 million, and has a $1.5 million term life insurance policy with 20 years remaining. His wife, also 50, is his designated beneficiary. The captain wants to protect more than 50% of the pension’s PV.
· Traditional Survivor Options:
50% Survivor Option: 7.9% reduction in pension
100% Survivor Option: 12.1% reduction
· 10-Year Certain Option:
4.3% pension reduction
Protects ~46% of pension PV during the first 10 years
By choosing the 10-Year Certain, the captain diversifies his protection timeline, complements his life insurance coverage, and saves 45%-64% annually compared to traditional options. This leaves more income for discretionary spending or investments.
Case Study: Retired Chief with a Disability Pension
A 65-year-old retired FDNY chief with a $3.2 million disability pension is ineligible for life insurance. He and his wife, also 65, have $2 million in investment assets, which they invest in a 10-year zero-coupon U.S. Treasury bond yielding 4.5%.
· Traditional Survivor Options:
50% Option: 17% pension reduction
100% Option: 24% pension reduction
· 10-Year Certain Option:
13% pension reduction
Guarantees pension payments through age 75
The zero-coupon US Treasury bond grows to $3.1 million after 10 years, providing a financial safety net when the 10-Year Certain Option expires. This strategy balances cost efficiency and flexibility while protecting the most critical decade of retirement.
Addressing the Concerns
Critics often highlight the following concerns about the 10-Year Certain Option:
Permanent Reduction: The lower pension after 10 years may seem unappealing.
Limited Duration: The 10-year period might appear inadequate.
However, these concerns overlook:
Affordability: The option’s lower cost preserves more of the retiree’s income.
Strategic Integration: Combining the 10-Year Certain with life insurance or investments creates a comprehensive plan.
Guaranteed Payments: The full pension is protected for 10 years, a significant advantage for many retirees.
When viewed strategically in some situations the benefits of the 10-Year Certain Option often outweigh its perceived drawbacks.
Conclusion
The 10-Year Certain Beneficiary Option has been misunderstood and overlooked for far too long. It is not the answer for every retiree, but in certain situations it may be the best choice. This option protects the full pension for a limited duration, contrasting with the 50% or 100% Survivor Options that offer lifetime protection at higher costs. Whether you’re balancing term life insurance with an option or navigating life insurance ineligibility and are faced with the increased costs of a disability pension option, the 10-Year Certain Option offers an innovative way to secure your family’s future while preserving your disposable income in retirement.
Isn’t it time to give the 10-Year Certain Option the attention it deserves?
Brave Eagle Wealth Management
At Brave Eagle Wealth Management, we provide FDNY retirees with a comprehensive wealth management solution, including:
Investment Management
Tax Strategies
Finalization Advice (pension options and life insurance)
Join us for an FDNY Retiree Workshop at our Wall Street office to explore our tailored solutions for FDNY retirees. Our Retiree Workshops are designed to help you learn more about what we do at Brave Eagle Wealth Management and how we can assist you in your retirement journey.
