• Has the bull caught a deadly virus?

    Dear Friends,

    The Coronavirus has certainly dealt a quick blow to the markets. The ongoing quarantines, lost production and supply chain disruptions are putting further stress on a Chinese economy that was already growing at its slowest level in 30 years and still dealing with the effects of the U.S. trade war. With each passing day there is increased concern that this China problem will become a U.S. problem that derails one of the longest periods of expansion on record. We believe this is a fair concern that cannot be ignored.

    Every expansion ends and is followed by a recession. Every recession ends and is followed by an expansion. This is the normal ebb and flow of the economy that has been going on for a hundred years plus. There is nothing in these headlines that suggest that this overall economic pattern won’t continue in the future. At some point, markets and the economy contract and reset themselves for the next period of expansion. Over the course of the next 30 years there will be no less than three expansions and three recessions based on the historical pattern. And guess what, for those of you who have been clients with us for 30 years or more, that’s exactly what you have experienced during that time – 3 recessions (1992, 2001 & 2008) and 3 expansions (all the other years!)

    So is Coronavirus the “thing’ that precipitates an economic recession in the near term. Frankly, maybe. Remember though most of the time these types of events produce more of a V shape in the economic pattern. The event produces an immediate impact on growth and then once resolved, acceleration occurs as that pent up demand is unleashed. Certainly, that was the template for prior outbreaks like SARS or Ebola.

    When the next recession does occur (and it will!). We believe that it will be quite mild and not a repeat of the financial crisis of 2008. Why? The combination of low interest rates and low unemployment should damper any economic decline.  The absence of any obvious asset bubbles (i.e. think real estate in 2008) also suggests a milder decline when it does occur.

    So, what to do for now? Well, bottom line, stay consistent and stay diversified. Your portfolios are predominantly invested in large companies that make the stuff that the world will continue to use each and every day. They are highly diversified (often with hundreds of different companies in them) and well balanced between growth companies and dividend paying companies. If you have some extra cash, now may be a great time to actually add to your accounts.

    And finally, a little prospective on the virus itself as the media (and even the CDC) are in overdrive mode which means there is little perspective provided and fear of the unknown is sky high. Every year in this country for the past decade, there was an average of 30-45 million cases of the flu that resulted in 20,000 – 40,000 deaths according to the CDC. Bottom line, the regular run of the mill flu is far deadlier to you living here in the U.S. So, wash your hands and take your flu shot!

    In the meantime, tax season is underway at the office and the pattern so far is decent news with most experiencing lower tax bills due to the continued effects of the tax cuts in 2018. As a reminder, please be sure to RSVP to our next client dinner at 5:30 on March 26, 2020 at the Country Club of Orlando. (1601 Country Club Dr. Orlando Fl.). We have had a change of speaker for that event and are pleased to welcome Emily Tillman who is an Equity Investment Director with American Funds.

    We look forward to seeing you on March 26.

  • 2020 FRS Letter

    2020 FRS Legislation Developments

    Did you get your Free Copy of our FRS booklet?

    For the latest updates, listen to our weekly podcast.

    Do you need a strategy shift under the FRS Investment Plan?


    January 16, 2020


    Dear State of Florida Employee,


    Welcome to 2020!  How has it been 20 years since we rang in the new millennium!  On December 31, 1999, the DOW set a then record high of 11,497.  On December 31, 2019 the DOW closed at 28,538.  That’s a pretty good return over those 20 years considering the litany of events that occurred!

    1. Market Commentary.

    2019 certainly generated a great return with the DOW up 22% and the broader markets up even more for the best calendar year since 2013.  But remember, a lot of that performance was a recovery from the 15% decline in the last three months of 2018.  The markets are only up about 7% from September of 2018 even with the big return for 2019.

    The major drivers for 2019 were consumer confidence and lower interest rates.  As we head into 2020, those catalysts appear to have continued strength.  Consumer savings is double from just a decade ago and consumer debt relative to GDP is at its lowest level since 2003.  Interest rates are certainly not expected to rise anytime soon either.  Consequently, as we detailed in our weekly radio show/podcast from December 29, we expect 2020 to produce positive results for the markets on the upper end of the historical average of 8-10%.  Stay tuned for how that plays out.  For 2019, our annual tongue in cheek fearless forecast turned out to be 99.5% accurate!

    As with any year, 2020 will have its share of volatility – we’ve already seen that just a few days into the year with the headlines swinging from the positive (a China trade deal to be signed later this month) to the negative (heightened Middle East tension).  As always, volatility is a normal part of the markets and history and countless studies confirm that being consistent is the best option for achieving investment results over time.

    1. Our Weekly Podcast; Upcoming Meetings & FRS Booklet.


    Many of you know we host Central Florida’s longest running radio program but did you know it is now available as a podcast.  Dollars and Sense is broadcast live every Sunday morning from 9:00 AM to 10:00 AM on Newsradio 93.1 and AM 540.  The show is then converted to both audio and video podcasts.  To listen,  follow us on Facebook under Nelson Financial Planning and be sure to like us too!  To watch, subscribe to our Nelson Financial Planning channel on Youtube.  We are also on a variety of other platforms like Twitter, itunes, Google and many others.  Visit our website at www.NelsonFinancialPlanning.com to find your favorite podcast format.


    Our spring client meetings are rapidly approaching. These meetings represent an opportunity for you and your friends to hear from senior financial personnel about the markets and the economy.  We are particularly excited to welcome Dr. Sean Snaith to our January 29 event.  Dr. Sean Snaith is the Director of the Institute for Economic Forecasting at UCF and is a nationally recognized economist and highly sought after speaker.


    Wednesday, January 29, 2020 from 5:30 – 7:00 PM

    Dr. Sean Snaith of UCF featuring dinner and drinks


    Thursday, March 26, 2020 from 5:30 – 7:00 PM

    Mark Seaman with American Funds featuring dinner and drinks


    Our Booklet – The State of Your Retirement; The Essential Guide for all State of Florida Employees – continues to be the one source for state employees that describes all of unique choices you face at retirement.  The latest edition includes information about your eligibility for the Health Insurance Subsidy along with a chapter on the importance of 457 Deferred Compensation Plans. Please be sure to call (407-629-6477) or email (Joel@NelsonFinancialPlanning.com) us to request your free copy today.


    III. Is a Strategy Shift under the FRS Investment Plan necessary for you?


    If you are in the FRS Investment Plan, the table below shows the most recent performance of the funds we typically recommend.  This mix represents a more growth approach which reflects the accumulation phase of life – those years when you are working, saving and accumulating the resources to retire.  However, as you approach retirement, you should enter into more of a growth and income approach.  Receiving income while maintaining some growth to cover that income becomes paramount in retirement.  This shift means that your investment mix needs to adjust as well.  We encourage those that are within 3-5 years of retirement to review their investment allocation.  As always, we are happy to provide free consultations to state employees who would like to review their investment allocation.  Simply contact the office at 407-629-6477 to schedule a conversation and be sure to have your login information handy.


    1. 2020 Legislative Update.


    In a sharp contrast from prior years, there appears to be a number of proposed bills in the upcoming Florida Legislative session that in fact benefit state employees.  For many years, your benefits have been getting cut in response to the  economic decline of 2008.  Specifically after 2008 there were substantial cuts in the employer contribution rates to FRS which had a profound impact on your retirement.  However, over the years, as the markets and economy have improved so to has the state of the Florida Retirement System.  As of November 1, 2019, the state’s FRS Pension Plan now has nearly $165 billion invested in a mix that is 70% in equities and 30% in cash and bonds – a very typical asset allocation that we follow as well for retirees.  This is a dramatic improvement over the $110 billion that was in the plan just 10 years ago.


    With those improved finances, there is finally proposed legislation that increases the contribution rates by employers to your retirement – albeit still not to the levels that existed prior to 2008!  SB 992 proposes raising the employer contribution rates from 6.3% to 10.3% for regular class employees and from 14% to 18% for special risk employees over a three year period between 2021 and 2024.  This would certainly contribute to a better retirement picture for all state employees.  Unfortunately, under this bill, state employees are also being forced to increase their required contributions from 3% to 5% for regular class employees in 2021 and from 3% to 5% for special risk employees between 2021 and 2024.


    1. Retirement Under the Florida Retirement System.


    There are many factors that go into properly planning your retirement.  The various types of FRS retirement accounts such as IRAs, FRS Investment Plan Accounts and Deferred Compensation Accounts are unique and have different tax consequences depending on your age.  These are very important and very complicated issues that require proper planning in order to have the most flexibility in retirement.


    If you are thinking of retiring or have recently done so, please contact us at 407-629-6477 to schedule an appointment to discuss planning your retirement in the most tax and cost efficient manner.  THESE RETIREMENT PLANNING SESSIONS ARE ABSOLUTELY FREE NO OBLIGATION CONVERSATIONS THAT ANALYZE ALL YOUR RETIREMENT OPTIONS.


    We look forward to seeing you at our events on January 29 and March 26. In addition, please be sure to visit the latest exhibition at Cornell Fine Arts Museum at Rollins College.  “African Apparel: Threaded Transformations across the 20th Century” runs from January 18 to May 17 and we are proud to be a presenting sponsor.  As always, please contact us with any questions on any financial matter.






    Joel Garris

    FRS Investment Plan Current Growth Recommendations

    As of December 31, 20192019201820173 YR
    5 YR
    10 YR
    FRS U.S. Large Cap Stock Fund28.87%-7.00%25.49%14.57%11.03%13.82%
    FRS Global Stock Fund30.48%-5.57%29.26%16.78%11.44%10.96%
    FRS Foreign Stock Fund27.40%-14.91%31.17%10.20%6.15%6.41%
    FRS U.S. Stock Market Index Fund31.09%-5.20%21.24%14.64%11.33%13.49%
    FRS Small/Mid Cap Stock Fund29.14%-8.19%16.31%11.31%10.33%14.51%

    Note: 10 year returns as of November 30, 2019


    Performance data quoted represents past performance, which is no guarantee of future results.  Please note that the information provided in this letter has NOT been approved or endorsed by the State of Florida or the Florida Retirement System.  All examples shown reflect actual performance; however, individual results may vary and values do fluctuate.

  • Top 10 Tax Changes for 2020

    The Tax Cut and Jobs Act (the “Tax Act”) enacted at the end of 2017 produced extensive changes to tax rates and deductions for both businesses and individuals. In addition, the recently enacted Setting Every Community Up for Retirement Enhancement Act (the “SECURE” Act) produced sweeping retirement changes. These two acts have widespread implications on your 2019 tax return. If you have any questions about the effect of these tax changes on your personal situation, please contact us at 407-629-6477.


    1. Mandatory Health Insurance Tax Removed. Effective January 1, 2019, the Individual Shared Responsibility Payment Mandate, which previously assessed a penalty on individuals without health insurance, was removed. If applicable, the penalty was calculated on an individual’s federal tax return and paid with their taxes. The penalty was the larger of $695 per adult ($2,085 per family) or 2.5% of annual income. When filing your 2019 tax return in 2020, there will be no penalty. Although removed on the federal tax return, some states, such as California, Massachusetts, New Jersey, Vermont, and Washington DC, still have their own individual health insurance mandate penalty.
    2. Elimination of the Stretch IRA. Effective January 1, 2020, the SECURE Act eliminated the Stretch IRA, which previously allowed most non-spousal beneficiaries to stretch the required minimum distributions (RMD) from an inherited retirement account over their own life expectancy. The SECURE Act requires non-spousal beneficiaries to withdraw all assets from an inherited account within 10 years of the deceased’s death. Beneficiaries no longer have minimum distribution amounts required each year but can instead withdraw the balance at their discretion until it must be liquidated in the 10th year. This change will not only accelerate distributions, but also accelerate the associated income taxes. This was a truly unfavorable change in the tax law and effectively eliminated one the most powerful and flexible estate planning tools that was previously enacted.
    3. Required Minimum Distribution (RMD) Age Raised and Age Restriction for IRA Contributions Eliminated. The SECURE Act increased the RMD age for IRAs from 70 ½ to 72. The SECURE Act did not change the age for Qualified Charitable Distributions (QCD), which remains at 70 ½. Any QCD made between age 70 ½ and 72 are considered non-taxable on your tax return and may reduce your future RMD since the IRA balance decreases from the distributions. Additionally, the SECURE Act removed the age restriction of 70 ½ for IRA contributions for taxpayers that are still working. This also applies to spousal IRAs. Thus, if at least one spouse is working after age 70 ½, both spouses can continue to make IRA contributions and receive a potential tax deduction.
    4. Higher Contribution Limits for 401(k)s, 403(b)s, 457s, Simple IRAs, IRAs & HSAs. The contribution limits to retirement accounts increases for 2020. For 401(k)s, 403(b)s and 457s the limit increases from $19,000 to $19,500. For those over age 50, the catch-up contribution limit increased to $6,500 allowing for a maximum possible contribution of $26,000 for 2020.  The limit for SIMPLE IRAs increases from $13,000 to $13,500 with the over age 50 catch up contribution staying at $3,000.  The annual limit on Traditional IRAs and Roth IRAs remains the same at $6,000 for 2020.  The age 50 catch-up contribution remains at $1,000 for these accounts.  The Health Savings Account limits also increases from $3,500 in 2019 to $3,550 in 2020 for individual plans while family plan contribution limits increase from $7,000 to $7,100.  In addition, HSA account holders age 55 and older may contribute an extra $1,000 annually.  These increases reflect inflation adjustments on the contribution limits and allow tax payers to save more.
    5. Qualified Business Income Deduction (199A) for Rental Properties. The Qualified Business Income Deduction (QBID) allowed owners of sole proprietorships or pass through entities to take a 20% deduction on qualified business income. With one year under their belt, the IRS has increased their scrutiny towards taxpayers taking this deduction, especially for rental real estate. The IRS released a renal real estate safe harbor, which requires taxpayers to keep separate records for the rental real estate business and perform at least 250 hours of rental services per year, to be able to utilize the deduction on their 2019 tax return. The taxpayer must keep contemporaneous records that detail the hours, dates, and description of services performed. Typical rental services include: advertising to rent, collecting rent, performing daily operations including lawn services, maintenance, and repairs, and managing the property. These activities can be performed by you, your employees, outside services, or independent contractors. In order to take the QBID on a rental real estate business, you must sign an election under penalties of perjury certifying that you meet the requirements for the rental real estate safe harbor.
    6. Alimony Payments and Divorce Agreement Modifications. Divorce or separation agreements executed after December 31, 2018 exclude alimony payments from the tax return entirely. To facilitate proper reporting under the new regulations, taxpayers are now required to indicate date of divorce on their 2019 tax return when reporting alimony. If a divorce or separation agreement executed prior to December 31, 2018 is modified, it may trigger use of the new tax treatment depending on the changes made. If you previously received a deduction for alimony payments and had a material modification to your divorce agreement in 2019, you may not be entitled to the deduction moving forward.
    7. Higher Medical Expense Deduction Threshold Averted. The medical expense deduction threshold was supposed to increase from 7.5% to 10%. Fortunately, the SECURE Act extended the lower threshold of 7.5% for 2019. Taxpayers can still deduct unreimbursed medical expenses but only if the expenses exceed 7.5% of adjusted gross income on their 2019 tax return and only if they itemize their deductions.
    8. 529 Education Savings Plan. One of the Tax Cuts and Jobs Acts changes now allows distributions from 529 Plans to be used to pay up to $10,000 of tuition each year at an elementary or secondary (K-12) public, private or religious school. Additionally, the SECURE Act allows for 529 Plan distributions to pay for student loan payments and the cost of apprenticeship programs up to $10,000 per plan. 529 Plans previously only offered tax-advantaged savings for qualified higher-education expenses. Contributions up to $15,000 are eligible for the gift-tax annual exclusion ($30,000 combined gifts for couples).
    9. Capital Gains & Dividend Tax Rates. The Net Investment Income Tax of 3.8% on dividends and capital gains remains. This additional tax applies to investment (unearned) income for single filers with income above $200,000 and married filers with income above $250,000. Investment income includes dividends, interest, rents, royalties and capital gains. The capital gains and qualified dividend rates remain at 0%, 15%, or 20% dependent on income and marital status.
    10. Form Changes. On the 2018 tax return, the IRS removed over 50 lines from the face of Form 1040 in efforts to simplify the tax return for individuals. Consequently, most of the 50 lines were then picked up on six new schedules. On the 2019 tax return, the IRS has reduced the number of schedules from six to three. Some of these items have been moved back to the face of Form 1040, while other items have been grouped together and/or renamed. Additionally, the IRS released a draft version of Form 1040-SR, which will be available for taxpayers age 65 and older. Essentially, it is a simplified income tax form with larger font and predominately displayed charts. Form 1040-SR was created to help seniors who file their tax returns on paper instead of electronically.

  • Dear Friends,

    Welcome to 2020! How has it been 20 years since we rang in the new millennium! On December 31, 1999, the DOW set a then record high of 11,497. On December 31, 2019 the DOW closed at 28,538. That’s a pretty good return over those 20 years considering the litany of events that occurred!

    2019 certainly generated a great return with the DOW up 22% and the broader markets up even more for the best calendar year since 2013. But remember, a lot of that performance was a recovery from the 15% decline in the last three months of 2018. The markets are only up about 7% from September of 2018 even with the big return for 2019.

    The major drivers for 2019 were consumer confidence and lower interest rates. As we head into 2020, those catalysts appear to have continued strength. Consumer savings is double from just a decade ago and consumer debt relative to GDP is at its lowest level since 2003. Interest rates are certainly not expected to rise anytime soon either. Consequently, as we detailed in our weekly radio show/podcast from December 29, we expect 2020 to produce positive results for the markets on the upper end of the historical average of 8-10%. Stay tuned for how that plays out. For 2019, our annual tongue in cheek fearless forecast turned out to be 99.5% accurate!

    As with any year, 2020 will have its share of volatility – we’ve already seen that just a few days into the year with the headlines swinging from the positive (a China trade deal to be signed later this month) to the negative (heightened Middle East tension). Please be sure to listen to our live show Sunday morning from 9-10 am on Newsradio WFLA Orlando or subscribe to any of our podcast or Youtube channels to stay informed along the way. Those social media channels can be found directly by going to the upper right hand corner of our website and just clicking on the icon that looks most familiar to you to become a subscriber.

    The start of a new year also means that tax time will be upon us soon. While the tax changes are not as sweeping as last year, there are certainly many to be aware of so be sure to review our next blog post of the Top 10 Tax Changes of 2020. In particular, two of the major changes involved removing the age cap of 70 on being able to contribute to an IRA if you or your spouse are still working and increasing the required minimum distribution age to 72.

  • Merry Christmas, Happy Hanukkah and Other Year End Musings

    Dear Friends,

    Happy Holidays!  We hope you all have the opportunity to spend time with family and friends this season and enjoy the craziness of life!

    This year the market has given us all much to cheer about but lest our memories fade too quickly remember where we were one year ago at this time.  The markets were in a bit of a tailspin and from early November until Christmas Eve of last year proceeded to decline by nearly 20% (19.6% to be exact). Our view for 2019 was that the markets would recover from that rapid decline (the Federal Reserve certainly helped out by cutting interest rates early in January and then again, a couple of more times this year) and so the year has unfolded somewhat as expected.  Better economic and employment data coupled with increased consumer spending have provided additional fuel for the markets upward trajectory as well.

    If you follow our radio program/podcast (which you can do by following this link), https://www.youtube.com/channel/UCMkUy7pgh5x0jzAYwdUx9og  you know at the start of every year we do our tongue in cheek exercise of a Fearless Forecast for what the markets will do for the coming calendar year.  This tradition started over three decades ago by my father-in-law Jack Nelson and it continues today.  We are on a bit of a lucky streak on our forecasting these days as this year will mark the fourth time in the past eight years where our forecast has been nearly spot on – plus/minus within 400 points of where the DOW finished the year at.  This year may turn out to be our most accurate yet – our prediction was a DOW at 28,400 by year end and yesterday the DOW closed at 28,239.  Needless to say – stay tuned as there are still a few more days left in 2019!  We will look to recap the numbers on our program that will air on December 29.  As for the other four years of those past eight – well, suffice it to say that we were less than accurate in our forecasting.  This underscores the reason why we don’t time the market!!!

    Looking ahead to next year, well, you’ll have to wait for our December 29 radio program/podcast for the official Fearless Forecast but basically, we believe the current positive economic trends will carry into 2020.  Beware though the uncertainty of election years can produce some heightened volatility (that plus China trade, North Korea, Brexit – there’s always a host of headline events that provide distraction).

    What we do know about 2020 is that we have a very exciting line up of client meetings ahead. In a bit of a change, for the first time in a number of years, we are bringing in an independent nationally known speaker for our first client meeting on January 29.  Dr. Sean Snaith, Director of the Institute for Economic Forecasting at UCF, will be our featured speaker for a dinner session.  Sean is a nationally recognized economist in the field of business and economic forecasting and has won multiple awards for the accuracy of his forecasts, his research and his teaching.  He is a highly sought after speaker and is frequently interviewed in international, national and regional media.  We are confident he will have much to say about 2020 and beyond!

    After that, our next client meeting will be another dinner session on March 26 and feature a national speaker from the American Funds.  Looking further ahead we are excited about returning to Quantum Leap Winery for our annual client appreciation event.  Remember it is the identical event on both nights so look for a formal invitation and response card in your mail in late March in order to secure your first choice of date.

    Lastly, thank you!  Our business continues to grow thanks to your continued confidence, loyalty and referrals.  We appreciate you all so much!

    Enjoy the holiday season!





  • Retirement Income – Your Age and the Account Matters

    Planning your retirement income as a member of FRS is a very intricate process. Depending on your age, your years of service, your job, your FRS choices, and your deferred compensation account, the composition of your retirement income and your taxes will be different. We typically spend several hours with FRS retirees properly planning their retirement income. We encourage you to contact us to schedule your complementary, no obligation conversation about planning your retirement income.


    We want to warn you about three examples of FRS retirees receiving bad advice that limited their retirement options.


    First, do not rollover your deferred compensation account to an IRA if you are under age 59½. Once this money is placed in an IRA, you have to pay an extra 10% tax penalty to use the money if you are under age 59½. If the funds are left alone in the deferred compensation plan, you have completely flexible access to the funds with no tax penalty. Bottom line, if you are under age 59½, leave your deferred compensation alone.


    Second, the guarantees and promises that come with these “new” income approaches that use annuities are simply not as they are described. These guaranteed income streams and returns are filled with caveats, fine print and high costs. These promises don’t actually guarantee any real return on your money as they only apply to internal insurance company values. If FDIC guaranteed CDs are paying around 2% currently, insurance companies aren’t really paying you 5% or more. Bottom line, if it sounds too good to be true, it is.


    In addition, the State of Florida is now promoting the use of annuities in its Investment Plan correspondence to state employees. The state’s suggested annuity approach offers an irrevocable option that leaves nothing to your beneficiaries. If state employees prefer a guarantee, they should consider staying with the Pension Plan.


    Third, if you are over age 55 and under age 59½ when you retire, you need to leave the amount of money you will need to spend before age 59½ in the FRS Investment Plan. The FRS Investment Plan provides you an exception to draw money out in any amount or frequency without having to incur a 10% tax penalty for early withdrawal if you retire in the year you turn age 55. This is a very valuable option for those that qualify. If all the money is rolled out of the FRS Investment Plan and into an IRA, you lose the flexibility of this option. Bottom line, if you are retiring in the year you turn age 55, you have more flexibility by actually leaving some money behind in the FRS Investment Plan.


    Properly planning your retirement income is of the utmost importance. These are just some of the examples we have seen where if the retiree had followed the advice given, they would have effectively eliminated their flexibility in retirement or even worse been subject to an extra 10% tax penalty. Simply rolling over your FRS Investment Plan, DROP or Deferred Compensation account to an IRA may not be the best course of action and could generate an extra 10% tax cost in retirement.


  • The Uniqueness of 457 Deferred Compensation Plans

    A deferred compensation plan is a type of retirement savings vehicle that is available for government employees. These plans are also known as 457 plans because that is the section of the IRS code that establishes them. All contributions to these plans are done at the discretion of the employee through payroll deferrals. Employee deferrals are the sole source of funding for these accounts. Pre-tax contributions will grow on a tax deferred basis similar to a 401k and are subject to the same maximum contribution limit of $19,000 (plus $6,000 if the employee is over age 50) for 2019. Roth contributions effective January 1, 2011 are also allowed to 457 plans. In addition, once retired, 457 plans can also be rolled into other types of retirement plans such as IRAs but that is where most mistakes happen with deferred compensation plans.


    Deferred compensation plans have different features from traditional retirement accounts like IRA’s or 401K’s. The most significant difference is that deferred compensation plans have no 10% penalty for early withdrawal regardless of age. Consequently, you can take distributions from a deferred compensation account and simply pay only the applicable taxes. This is a major advantage and incentive for employees to put some of their paycheck into such accounts over their working years. Having a deferred compensation account gives one a resource to use in retirement without having to worry about an extra 10% tax penalty. In addition, access to the monies in your deferred compensation account is usually available within less than a month after your final day of work. This feature particularly helps retirees under the FRS Investment Plan who have timing issues in accessing their monies.


    One of the biggest mistakes retirees can make is to roll their deferred compensation account over to an IRA. Once that money is in an IRA, then the rules of an IRA, particularly those that impose a 10% tax penalty, apply. FRS members should only roll their deferred compensation accounts over once they have passed age 59 ½ when there is no risk of any penalty regardless of the type of account their money is in.

  • Shifting Sands for Current Employees – The Litany of Changes since 2008

    In 2011 with the inauguration of Rick Scott and a Republican Legislature, the Florida Retirement System started to change. These changes were predicated on the aftermath of 2008 on the state’s finances. The market decline during 2008 and 2009 dramatically reduced the value of the FRS Pension Plan assets from about $135 billion to under $100 billion. As a result, politicians embarked on a cost cutting spree that effectively reduced your retirement benefits. The effect of these changes on employees depended on whether they were in the Pension Plan, DROP or the Investment Plan. These changes still remain in place despite the improvement in state finances and the value of Pension Plan assets returning to over $160 billion as of June 30, 2018.


    The single biggest change was the requirement for all state employees to contribute 3% of their salary to the Florida Retirement System. For those in the Investment Plan, these monies go into their own account. For those in the Pension Plan, those monies go into the general fund of the Pension Plan. This required contribution did not apply to those employees who were currently on DROP. This required contribution continues to effectively act as a 3% reduction in one’s salary. For most employees that was particularly tough to take over the past few years given the absence of any salary increases.



    Meanwhile, the biggest change for those under the Pension Plan was the effective elimination of the Cost of Living (COLA) of 3% per year that is part of the calculation of one’s Pension Plan benefit.


    While the original legislation stipulated that this was a five year suspension ending in 2016, by requiring legislative action to bring the COLA back, it effectively served as an elimination of this benefit. To date, there has been no real movement by the Florida Legislative to reinstate the COLA for state employees.  Given that the value of the Pension Plan assets have returned to a value greater than what they were before the 2008-2009 financial crisis, the COLA benefit should arguably return.


    The effect of this change is to prorate an employee’s COLA benefit across their total number of service years.  For example, if you have 25 years of service as of July 1, 2011 and worked another 5 years, your COLA benefit under the FRS Pension Plan would decrease to about 2.5% per year from the current 3%.  Similarly, if you plan to retire in 2020 with 25 years of service, you would have 9 years at a COLA of 0% (the years since 2011) and 14 years at a COLA of 3%.  This would average out to produce a COLA of 1.7% on your pension in retirement.


    Employees who choose to go on DROP are also affected by these legislative changes as well. Prior to 2011, DROP monies earned a guaranteed rate of return of 6.5%. After 2011, this rate dropped dramatically to just 1.3%. Over the five year DROP period, this 5.2% annual differential has a dramatic effect on reducing DROP values.  In fact, employees should compare the impact of the additional years of service time on their pension with this more limited benefit of DROP.  In some cases, the additional years increase one’s pension benefit more significantly than the potential income from the lump sum DROP amount.  Remember, years spent on DROP don’t count towards calculating your pension benefit.


    Investment Plan members were able to escape the effect of the 2011 legislative changes but in 2012 politicians caught up with them. In 2012, House Bill 5005 reduced the contribution paid by employers into the Investment Plan by a huge margin.  Prior to July 1, 2012, the total contributions to one’s Investment Plan account was 22% for special risk employees and 9% for regular class employees. After July 1, 2012 those contribution rates declined to 13% and 6.3% respectively.   Since then, these contribution rates have increased only slightly to 15% for special rate employees.  Unfortunately, for regular class employees the contribution rate has further declined to 6%.  These rates include the mandatory 3% employee contribution.


    While billed as a necessary change to level the benefits between the Pension Plan and the Investment Plan, it served to disproportionately undermine the benefits of the Investment Plan. In addition, these changes in contribution rates were buried in legislation that was passed at the 11th hour and largely occurred without much discussion with the affected employees.


    Of course, the deal is also different for new State employees as well. For those entering FRS employment on or after July 1, 2011, the vesting under the FRS Pension Plan increased to 8 years from 6 years. Vesting under the FRS Investment Plan remains at one year. In addition, average final compensation under the FRS Pension Plan increased to the 8 highest years of service from the 5 highest years.


    The age eligibility for retirement increased from age 62 to age 65 for regular class and from age 55 to age 60 for special risk. The retirement eligibility based on years of creditable service increased from 30 years to 33 years for regular class and from 25 years to 30 years for special risk. New FRS employees will need to work longer in order to receive comparable benefits available to current FRS employees.


    In addition, new employees must make an election between the Pension Plan and the Investment Plan within eight months after their hire – otherwise the state will choose for them!  Effective January 1, 2018 if new employees do not make an election by the end of the election period of eight months, there will be a default membership.  Employees in classes other than the Special Risk Class will default to the Investment Plan and members in the Special Risk Class will default to the Pension Plan.  All members will continue to have a second election but employees should make their first election immediately after their hire.  Otherwise you may wind up using your second election to reverse a default decision that you didn’t intend to make.




    The bottom line on all these changes is that it affects your decision and timing on making any changes to your retirement. In the past, when employer contribution rates to the Investment Plan were 30% higher, the timing of any switch to the Investment Plan was somewhat immaterial. Now, the timing of the switch really matters. Over the years we have reviewed countless individual comparisons and while each situation is unique, based on these reviews, it seems that any move to the Investment Plan needs to be either at the inception of your career or at the end. This also preserves your second election to switch among the FRS options for future use as well.


    At the beginning of your FRS career you have time to generate a sufficient balance in your Investment Plan and can take advantage of its shorter vesting requirements. In fact, we have seen some scenarios of late where employees who had initially started with the Investment Plan had the opportunity after 10-15 years to buy back into the Pension Plan and retain a significant portion of their Investment Plan balance.


    In contrast, those that wait to switch at their 25th year of service (30 years if not special risk) experience the largest run up in their projected lump sum balance in the last five years of service. After hitting these full retirement service years, the projected balance rises at a rate similar to inflation. In those cases, it may make sense to make a move in that 25th (or 30th) year of service if an employee wants to go into the Investment Plan. The hardest scenarios are those with 15 years or so of service. For them, it probably makes sense to just wait things out before considering any move among the FRS options.


    In addition, those retiring under the FRS Investment Plan need to be aware of the timing restraints that exist to access your money. Retirees must wait one full calendar month after the month in which they retire before they have an early access opportunity to draw funds from the FRS Investment Plan. In order to shorten this window, one should retire at the end of the month rather than the beginning of the month. For example, if you work a few days at the beginning of a month, you would have to wait the rest of the month plus all of the next month before getting any access to your FRS Investment Plan. This early access is also limited to just 10% of the balance and is available only to retirees who meet the normal age and years of service retirement parameters. In order to gain full access to their Investment Plan balance, retirees then have to wait another full two months after the early access period. Consequently, it often amounts to over three months before retirees can set up normal retirement income from their accounts. This is a significant issue with retiring under the FRS Investment Plan and retirees need to consider their timing restraints and plan their finances accordingly in order to have enough resources to bridge those first three months of retirement.

  • The FRS Investment Plan – Leaving It To The Kids

    The FRS Investment Plan option started in 2002. The Investment Plan is a defined contribution plan in which employer contributions are a set amount as defined by law. The period of time in which the Investment Plan monies actually become yours or vest is only one year. The 3% employee contribution is still required but those monies go directly to your own personal Investment Plan account rather than to the general FRS fund. The amount of your retirement income depends directly on the performance of your Investment Plan account balance. Unlike the FRS Pension Plan, there is no fixed benefit level at retirement with the Investment Plan.


    The Investment Plan is funded through defined employer contribution rates based upon your salary and your FRS membership class. The contribution rates are currently at 6% for regular class and 15% for special risk class which include the mandatory 3% employee contribution. These contributions are made every pay period to your own personal Investment Plan account. Prior to July 1, 2012, these contributions were 30% higher but this reduction occurred to level the Investment Plan benefits with prior cuts that were made in 2011 to the FRS Pension Plan benefits. Regardless, it is disappointing to have any cuts to contribution rates especially in this time of stagnant salaries.


    In addition, these cuts in the contribution rates often mean that the timing of any decision to switch from the Pension Plan to the Investment Plan should be carefully considered. The second choice service on www.myfrs.com allows you to calculate different scenarios for when your lump sum balance is maximized. Often this occurs after you have completed your required years of service for full retirement (i.e. 25 years as special risk and 30 years as regular class for those hired prior to July 1, 2011). After that, if you are still working, the lump sum benefit amount does not increase that much at all. The other alternative is to choose the Investment Plan at the inception of your career with the state. We often see examples where this leads to a greater amount of money than the lump sum amount available on a subsequent conversion from the Pension Plan.


    The Investment Plan contributions are sent to your personal account within the FRS Investment Plan. Within this account, there are only 21 different investment choices (10 of which are target date funds) to invest your contributions. While these choices are somewhat limited in number, there are some worthwhile investment options. We monitor the performance of the investment options we recommend within the FRS Investment Plan and let you know if any changes are warranted through our regular correspondence. Remember the overall balance in one’s FRS Investment Plan account is solely dependent on how your underlying investments perform.


    In addition, when you retire, this account needs to follow a growth and income approach to provide you with a monthly retirement benefit like what you would have gotten under the Pension Plan. This means that you cannot treat the Investment Plan like a cookie jar in retirement by taking chunks out of the balance. The objective with the Investment Plan balance is to generate a regular monthly income by using a diversified and properly allocated investment approach. This is where our firm provides its greatest assistance to state employees by working together at retirement to establish a financial plan for the rest of their lives.



    In summary, the Investment Plan provides you an option to personally control your retirement monies. Your years of FRS service are represented entirely in a cash value lump sum. The beneficiaries of this lump sum can be your spouse or children when you pass. However, this lump sum must be used to generate your retirement income. It does not come with any guaranteed benefit like the Pension Plan. For a more complete description of the FRS Investment Plan, please refer to the Summary Plan Description of the FRS Investment Plan prepared by the State of Florida Division of Retirement located within www.myfrs.com.


    For a complete comparison of the advantages and disadvantages of these FRS options, please refer to FRS Plans Advantages and Disadvantages prepared by the State of Florida Division of Retirement at www.myfrs.com. In addition, we are here to meet with state employees at any time at no charge to discuss these options.



  • DROP – The Holding Bin for Your Pension Check

    DROP is a program that allows you to retire without terminating your employment while your retirement benefits accumulate in a separate account earning 1.3% as of July 1, 2011. Previously, the earnings rate was 6.5%. In essence, you retire under the FRS Pension Plan and then have the ability to aggregate a lump sum cash benefit. At the end of your DROP period of 5 years, you must terminate employment. For a more complete description of DROP, please refer to the Frequently Asked Questions about DROP prepared by the State of Florida Division of Retirement available within www.myfrs.com.


    DROP is not extra money or some kind of bonus. It is simply holding your pension check while you are continuing to work for the State. DROP participation means you retired under the FRS Pension Plan based upon your years of service at the time you elected DROP participation. By retiring at that time, your subsequent retirement benefit that would accrue over the next five years is set aside in a lump sum payment. However, your monthly check that you receive from the FRS Pension is less than it would be since the five years you spend in DROP do not count for the FRS Pension Plan calculation. In addition, the earnings rate on these DROP monies has been reduced from 6.5% to 1.3%. This drop in interest rate really undermines the value of DROP particularly considering that your years in DROP don’t increase your benefits under the Pension Plan.


    The DROP balance should be rolled over to either the FRS Investment Plan or an Individual Retirement Account (IRA) upon leaving the state’s employment in order to properly manage taxes and retirement income. This rollover should be done properly in order to avoid full taxation of the lump sum amount. As you use this DROP amount to provide retirement income, regular income taxes will apply. By using an IRA you set the proper tax withholding rather than being subject to the 20% mandatory withholding that applies for direct DROP or FRS Investment Plan withdrawals.


    However, if you are under the age of 59½ at retirement than you want to roll your DROP over to the FRS Investment Plan if you plan to use your DROP monies over time. Assuming you meet certain parameters (over age 50 and special risk or over age 55 and regular class), you are able to avoid the 10% penalty for early withdrawal by drawing directly from DROP. Alternatively, you could use the FRS Investment Plan (if over age 55) to provide penalty free access to these DROP monies over time. A major distinction between DROP and the FRS Investment Plan is that the DROP rules specifically recognize the age 50 public safety employee exemption as an exception to the normal 10% early distribution penalty. Meanwhile, the FRS Investment Plan does not specifically recognize this age 50 exception and only provides for the usual age 55 exemption. This is where your age, your job and where your money winds up starts to really matter if you want to reduce your taxes in retirement.