The State of Your Retirement Intro & Chapter 1: The FRS Pension Plan – The Guaranteed Check a Month Club
It is surprising to me how often state employees are not given all the information necessary to make an informed decision about their retirement. This series will feature seven chapters covering, among other topics, the Pension Plan, DROP, the Investment Plan, the litany of changes since 2008 and some successful retirement income strategies that reduce your taxes and provide flexibility in retirement.
If you are a member of the Florida Retirement System (FRS), you have seen a lot of changes to your retirement options over the past few years. The state of your retirement has changed dramatically and what made sense in the past often does not make sense today. We regularly meet with state employees to help them figure out these ever changing options. These meetings generally focus on reviewing the pros and cons of your retirement choices to help you make an informed decision and are done as a free service to you.
While you are working, we keep you informed on a continuous basis by mailing FRS Update letters every few months or so. We do not charge for this ongoing service. Simply put, keeping you informed about the latest legislative changes and market performance while you are still working is somewhat straightforward. It also gives you an opportunity to try us out before you’ll really need us in retirement.
As a current employee, your options have changed a lot since 2008. These changes fundamentally shift your retirement options.
Once you retire, things get a lot more complicated. Our focus shifts to providing personalized retirement income strategies to meet your unique retirement expenses and tax liabilities. These income needs are ever changing and the tax implications in retirement are very important. There are a variety of accounts available as a state employee and each has different tax implications depending on your age and job. Your investment focus also shifts to a more growth and income oriented mix which is very different from the approach used while working. Simply put things get a lot more complicated in retirement and that’s when our customized advice applies.
The FRS Pension Plan — The Guaranteed Check a Month Club
The oldest retirement option within the FRS is the Pension Plan. The Pension Plan is a defined benefit plan where your benefit of a monthly retirement check is defined by law. The amount of this check is determined by your years of service, your creditable service percentage and your average final compensation. In addition, you select from among four different options for your retirement income. The two most popular options are Options 1 and 3. Option 1 generates the most amount of income but ends when you die and Option 3 generates income for you and then your spouse when you die but with a reduction in income over Option 1 of typically 15-20% depending upon the age of your spouse.
This retirement income amount is annually supplemented in retirement by the application of a cost of living adjustment (COLA). However, the COLA has been suspended effective July 1, 2011 which results in a reduction of the prior COLA benefit of 3% per year. Despite better finances in Tallahassee, there has been no suggestion about reinstating this COLA in the future. Consequently, the COLA continues at 0% for all years of services after 2011.
Effective for new employees after July 1, 2011, retirement eligibility has increased to age 65 or 33 years for regular class and age 60 or 30 years for special risk class. Previously, normal retirement was age 62 or 30 years for regular class and age 55 or 25 years of service for special risk class. The vesting period for the Pension Plan has also increased from six to eight years for new employees hired after July 1, 2011. In addition, a 3% employee contribution is required that goes into the general Florida Retirement System.
For a more complete description of the FRS Pension Plan, please refer to the Frequently Asked Questions about the Pension Plan and the Pension Plan Summary prepared by the State of Florida Division of Retirement. Both of these documents can be found within www.myfrs.com .
In summary, the FRS Pension Plan is a traditional check a month retirement plan. This check is guaranteed by the state to last for your lifetime or, with a reduction in income, for a set period of time or the life of another like your spouse. There is never any ability to utilize lump sum amounts from the Pension Plan nor leave a legacy to your beneficiaries. For some, this is the appeal of the Deferred Retirement Option Program (DROP).
Where indicated, market data and performance represents past performance which is no guarantee of future results. Individual results may vary and values do fluctuate in any investment. This booklet contains our most current understanding of the Florida Retirement System and U.S. tax laws as of October, 2016. This booklet is intended to detail complicated retirement topics but is not a complete discussion as each individual’s situation is different and various exceptions exist. Nelson Financial Planning offers securities through Nelson Ivest Brokerage Services, Inc., a member of FINRA/SIPC. Please note that the information provided in this document has not been approved or endorsed by the State of Florida or the Florida Retirement System.
The best part of the start of the fourth quarter this year is that means there are only 35 days left of listening to Donald and Hilliary insult each other. That’s the good news! Of course, the bad news is that we’ll have to listen to one of them for the next four years!
The usual question we get in a Presidential election year is who’s better for the market? Last week’s post “Donkeys, Elephants, Bulls & Bears Oh My!” provides an in-depth analysis to that question. I wrote this article last week and posted it on Facebook and Twitter so be sure to follow us on those social media sites as well. Bottom line: the historical combination that produces the best market results is a divided government. Regardless of who wins the White House, I suspect that we will continue to have gridlock in Washington!
The third quarter helped the markets get back on track for the year. Your quarterly statements that you will receive in the next week or so will show an overall gain of 4-6% for the quarter – all in the wake of Brexit. For the year so far the gains are about 7% which would put the year on track to be in line with long term historical market averages of 8-10%.
I still think there is a decent chance of being on the upper end of that range by the time the year ends because of continued low interest rates and gas prices which are encouraging consumer spending. Whenever I drive around the Winter Park area, I can clearly see this in the wait times at restaurants and the abundance of commercial construction projects.
Against these obvious signs of improved consumption, there seems to be a continued and heightened sense of impending market decline. This negativity is often a contrarian indicator as bull markets typically turn south in euphoric moods not pessimistic ones. In fact, history confirms just that. According to Barron’s, when market prognosticators predict little or no gain, the S&P 500 has traded higher 12 months later 95% of the time, with an average gain of 11%. On the other hand, when strategists are at their most bullish, there is about a 50% chance of a market fall. In other words, be optimistic when the world is pessimistic.
Our next client meeting is coming up on Saturday, October 29. This is our breakfast event and starts at 9:00AM at the Country Club of Orlando, 1601 Country Club Drive, Orlando, FL. David Hanna of the American Funds will be providing an overview of the year and a look ahead to 2017. David is always a dynamic speaker so be sure to attend this meeting. Please RSVP on our website or call the office at 407-629-6477. Feel free to invite your friends as well. Like the earlier meeting this fall, we will have some goodies available with our new name and logo so be sure to come.
If we have not seen you lately, please be sure to visit with us before the year ends. In the meantime, don’t forget to listen to the radio show “Dollars and Sense” every Sunday at 9AM on Newsradio 1025 WFLA. The radio show is a great way to hear my latest thoughts and reactions to the day’s headlines. If you miss the radio show you can always catch it at your convenience on any one of the social medial channels we use – Linkedin, Facebook, Twitter, Goggle & Soundcloud. Just click on any of the icons after my name below and you’ll be connected to be added as a follower.
Look forward to seeing you on the 29 th for breakfast.