We hope you are well and staying healthy.
Please know we are here to help. We are open and happy to chat by phone or video or meet in person at our office under CDC guidelines.

  • What You Need to Know About Your Severance Package

    In times of financial upheaval, companies often offer severance packages and/or early retirement to some of their employees. The truth is that by doing this, a company can release someone with years of experience and a commensurate salary, replacing that person with someone who has less experience and can be paid less. Whether or not to take the early retirement or severance can be a stressful question, especially because there’s often a limited time in which to make the decision.

    There’s a lot to consider when making this kind of decision. You might be offered a severance package when you’re already nearing retirement age. Do you take the severance or retire early? The severance package may be substantial, but will it cause you to miss out on retirement benefits?

    For a person who is not quite at retirement age, a large severance package may be attractive, but is it worth looking for another job? Entering the job market in middle age can be risky. On the other hand, if you’re being offered a severance package, your company may not be doing very well. In that case you could be at risk of losing your job in the near future anyway, which would make taking the offered severance a good idea.

    Something that’s important to consider is your health insurance. If you’re suddenly out of a job, where will you get health insurance? More importantly, how will you pay for it? If you opt for COBRA, will you have to pay for the whole thing, or will your employer contribute? Can you possibly move to your spouse or partner’s insurance? Every situation is unique. Severance packages are based on a dollar amount for a certain number of weeks, based the number of years you’ve worked for the company. When you look at the health insurance costs the package might seem less appealing.

    If you’re offered a severance package, in some cases you can negotiate a better one. To do this, first conduct some research to determine what you should reasonably be able to expect. Then, gather relevant information about your length of employment current earnings, awards you’ve received for successful service, and anything else that demonstrates your value to the company. Be calm and confident, and once the package is offered, look for areas where it might be increased. If there’s a noncompete agreement included in the package, you may be able to use that as leverage. If the company is unwilling to increase your offer, ask for an extension of benefits. Severance package negotiations are not always successful, so be prepared to politely accept a refusal. If you are successful in your negotiation, make sure to get it in writing as soon as you can.

    If you need help deciding what to do about the severance package you’ve been offered, Nelson Financial Planning can help. As one of the best financial planning firms in Central Florida, we provide guidance and financial advice so that you can make informed decisions about your future. We believe you should enjoy your retirement, so we’ll work with you to create a plan for a stress-free future. Call (407) 307-3061 or contact us today to set up your free consultation.

  • 2021 Social Security Changes

    2020 has been tumultuous, who knows what 2021 will bring? One thing is certain: there will be some changes to social security. While no one yet knows some of the things that will be changing, we’ve got a pretty good overall view.

    • The first important thing to know about Social Security in 2021 is that there will be a 1.3 percent cost of living increase (COLA). This isn’t much of an increase; it’s about a $20 jump per month for most people. If you’re married, and you and your spouse both receive Social Security, you’ll probably see an increase of about $33, and a widow or widower with two kids can expect a raise of about $39 per month. The maximum amount anyone will get is $137 per month, increasing the income of someone who retired at age 66 to a maximum of $3148 per month. Your personalized COLA numbers will be posted in your Social Security account in December 2020, so that you can know what to expect when the raise goes into effect in January.
    • Disabled workers will get this COLA as well. SSI for an individual will go up by $11, and for a couple, $16 per month. The number is $16 for a disabled worker, too, and a disabled worker with a spouse and kids is looking at about $29 per month.
    • The COLA is less than it has been in recent years, but not by much. The 1.3 percent number was calculated based on year-over-year inflation. To be more specific, it’s the difference between the Consumer Price Index for Urban Wage Earners in the third quarter of 2019 and the third quarter of 2020. There’s not always a COLA, because if the prices have fallen, there’s no adjustment. That happened in 2010, 2011, and 2016, but in 2020, there was a 1.6 percent COLA. The highest COLA since the adjustment became automatic in 1975 happened in 1980; that year it was 14.3 percent.
    • The maximum earning cap is going higher, too. Social Security is funded by a payroll tax, which is set at 12. 4 percent on eligible wages. That 12.4 percent is split in half, with employees paying 6.2 percent and employers paying the other 6.2 percent. Self-employed workers have to pay the entire 12.4 percent. If you make over a certain amount of money, though, the amount that’s subject to these taxes is capped. In 2020, the maximum taxable amount was $137,700, but it’s going to be $142,800 in 2021.
    • The amount of money you can earn and still receive benefits is going up in 2021. People who take retirement benefits before they hit retirement age, while they’re still working, don’t get full Social Security benefits. The way it’s calculated is that there’s a certain amount they’re allowed to earn and for every $2 above that amount, they lose $1 in benefits. In 2020, the amount a person could earn from working while receiving Social Security benefits was $18,240 per year, but in 2021 it will climb to $18,960 per year. The year you reach full retirement age, the earnings limit goes up to $50,520, and the penalty is reduced to $1 withheld for every $3 you earn, and once you actually turn your full retirement age, there’s no penalty if you choose to work and collect Social Security simultaneously.
    • Full retirement age is shifting. When the program was initially established, in 1935, the full retirement age was set at 65. Currently, it’s 66 years and 8 months, but for people who turn 62 in 2021, it will be 66 and 10 months. The full retirement age is set to increase in two-month intervals for people born between 1955 and 1959, and for those more in 1960 or late, it will be 67.
    • Medicare increase could reduce some of 2021’s gains. We’re not sure yet how much that will be, but it has the potential to eat into your COLA. The good news, thanks to a recent law change championed by AARP, the increase should be less than has been projected.

    Social Security has been around since 1935, and most retirees depend on it, but a lot of myths persist about the system. There’s the idea that Social Security is running out of money or being raided to pay for other programs. Many people also believe that our elected officials don’t pay into the Social Security program like the rest of us. In truth, as long as payroll taxes continue to be paid, Social Security will not run out of money, because it’s a pay-as-you-go system. Senators and representatives have been paying into the program since 1984. And money can’t be stolen from Social Security to pay for other programs, though it can be borrowed. The tax revenue from Social Security is invested in special U.S. Treasury securities, and as with all Treasury bonds, the proceeds can be spent by the federal government on other programs. However, the Treasury, like other bondholders, has to pay the money back, with interest. There are funding challenges, because the retiree population is growing faster than the working population, and people are living longer. This could result in a reduction of benefits by about 2035, though the program still won’t be broke. It’s likely that it will be revamped between now and then to cover the deficit, much like it was in the 1980s.

    Another myth is that Social Security is like a retirement savings account, with money being socked away in a personal account for you, paid to you with interest when you retire. Your benefit is not based on how much you put in, but rather how much you earned over your working life. On average, Social Security benefits are about 40 percent of a person’s pre-retirement earnings. That’s one reason it’s important to have a retirement fund that will provide you with supplemental income after you retire.

    As we begin to emerge from the COVID-19 pandemic, economists are describing the economic recovery as being K-shaped. The economy is often explained using letters like a U, V, or W, to demonstrate the ups and downs, but what does a K represent? It’s indicative of the fact that people in higher-income households, with jobs that are more flexible and easier to do from home, are doing better in this time of recovery than lower-income families with less portable jobs. Similarly, larger companies have fared better than small businesses. These are factors to consider when you’re making investments during this time of upheaval.

    When you’re looking for good advice on building a strong financial plan, Nelson Financial Planning can help. As one of the best financial planning firms in Central Florida, we provide guidance and financial advice so that you can make informed decisions about your future. We believe you should enjoy your retirement, so we’ll work with you to create a plan for a stress-free future. Call (407) 307-3061 or contact us today to set up your free consultation.

  • Do You Know Where Your Money is Going? What Do you Overspend On?

    In our spend-happy culture, it’s sometimes hard to find financial peace of mind. The national credit card debt is up over $200 billion over the past five years, and things like online shopping and keeping up with the Joneses make it almost certain that this number is going to continue to snowball. Enjoying your life is important but having a sound financial plan is vital. One key to gaining a strong financial footing is identifying areas in which you overspend, perhaps listed below.

    • Clothing: Don’t pay full price for clothing. There are plenty of tricks for getting around this, from shopping consignment to finding promo codes online to joining loyalty programs.
    • Water: Bottled water costs more than gasoline, so skip it. Instead, buy a filter for your home and use reusable bottles.
    • Car Insurance: Most people choose an insurance company and stick with it, even if the premiums keep climbing. By shopping around every two to four years, you could reduce your rates by $100 to $200 a year.
    • Being over-insured: It’s important to have the insurance you need, but Insurance companies, tend to play on people’s fears, roping them into insurance they don’t need, like extra rental car protection or too much life insurance. Additionally, about 84 percent of Americans don’t ask for basic discounts in their insurance, though these discounts could save hundreds of dollars each year.
    • Cheap things: Dollar store items may seem like a bargain, but if they break almost immediately, they’re not such a great deal. Look for mid-priced items of good quality instead.
    • Expensive things: While going for the cheapest option often means missing out on quality, buying the most expensive doesn’t guarantee it. Shop carefully: high priced mattresses and top-dollar hotels, for instance, are unlikely to be worth more than more reasonable options.
    • Subscriptions: Streaming services, gym memberships, and anything that auto-renews can all cost you in the long run. Take a hard look at what you’ve subscribed to and decide what you can do without.
    • Eating Out: It’s fine once in a while, but if you make it a habit you can easily end up throwing away hundreds of dollars every month.
    • Eating In: If you’re not careful, it’s easy to overspend in the grocery store, overbuying food you paid too much for and will likely eventually throw away. Never shop when you’re hungry, plan meals before you go, based on the sales, and always shop with a list.

    At Nelson Financial Planning we want to help you create a financial plan that provides for your future. As one of the best financial planning firms in Central Florida, we provide guidance and financial advice so that you can make informed decisions about your future. We believe you should enjoy your retirement, so we’ll work with you to create a plan for a stress-free future. Call (407) 307-3061 or contact us today to set up your free consultation.

  • Financially Savvy House Buying

    On 8/17/2020 we did a radio show talking about a Money Magazine article.  This article talked heavily about the proper way to buy a house.  Buying a house can be a very happy and exciting time or a frustrating financial trap.

    Buying a home is one of the most expensive purchases most people make in their lives. But before signing any documents and letting your friends and relatives know about this huge financial milestone, there is a very important factor which tends to get overlooked by a lot of future homeowners: not knowing how much house they can afford.

    It is completely understandable that many of us allow our excitement and emotions to take over during our home buying journey; especially if you find the house of your dreams. When this happens, it’s easy to forget about the real numbers, which can harm you down the road.

    A good way to start figuring out how much house you can afford is by using the 28%/36% rule with your monthly gross income (MGI). 28% represents the portion of your MGI that goes to your mortgage expenses while 36% represents the portion of your MGI that goes to all of your other debt obligations. To be on the safe side, get in touch with your preferred lender to get an idea of what loan amount you can qualify for.

    For more on a financially savvy way to buy a house, click on the link to view the article posted by Money Magazine https://money.com/get-items-removed-from-credit-report/ or visit our YouTube channel to watch our 8/17/2020 radio show https://youtu.be/UHcL_nB485I

  • Hello Friends

    2020 will certainly go down as a historical year – and we still haven’t gotten to the election yet! We hope you are well and staying healthy.

    Speaking of elections, we thought it would be interesting to go into the archives and pull the election piece we wrote four years ago. At that point, eight years of a Democratic Administration were ending and the election looked like a lock for the Democratic candidate. What’s interesting about this four year old article is that it needs NO updating – except for the date of the election which is November 3 for the 2020 election and not November 8 (which was election day in 2016).

    Here are two of the more notable quotes from the article. “Presidents from both parties have raised or reduced taxes, supported or opposed free trade, increased or reduced regulatory burdens etc.” “History tells us that there is no magic formula to the Presidency and stock market movement.” Frankly, we believe that the after shock of the Covid pandemic will consume much of the next Presidential term and dictate the direction of many policy choices.

    Despite all of the headlines these days, the markets have shown a remarkable level of resiliency. However, resiliency does not equate to all clear and we expect volatility to increase significantly in the months ahead as the election draws nearer and the economic impact of the continued rise in Covid cases starts to show. As always, remain consistent and know that your allocation is designed to be a bit of an all weather allocation as we never know when crazy stuff is going to happen.

    Unfortunately, given the current state of Covid cases, we can’t in good conscience bring together a large group of people for our usual fall meeting formats.  And for that we are deeply disappointed. But we wanted to at least do something that felt normal so we are doing a Shred Day at the office.

    Many of you have told us that you have spent this quarantine time organizing things at home and have documents that need to be disposed of properly. Here’s your chance!  We also have the option to bring your old digital devices and computer equipment for proper disposal as well. You can stay in your car and we will unload your car and bring you a box lunch.

    Our series of portfolio manager conference calls continues. These calls represent an opportunity for you to hear directly from senior investment personnel about the decisions and changes that are being made on a daily basis to your investments. These calls require no internet or computer equipment – simply dial the phone number and enter the meeting number to connect. Please join us for the following upcoming calls at 5:00 PM sharp and email us any of your questions ahead of time.

    If you have not visited with us yet in 2020 please contact the office to arrange a conversation. We are available by phone, video or in person in our outdoor meeting space with the CDC recommended universal masking protocol.

    Look forward to seeing you on Shred Day.

    Fondly,

     

     

    Joel Garris

  • Nelson Ivest Brokerage Services, Inc. & Nelson Financial Planning, Inc. Business Continuity Plan

     

    Nelson Financial Planning, Inc. and Nelson Ivest Brokerage Services, Inc. have developed a Business Continuity Plan on how we will respond to events that significantly disrupt our business.  Since the timing and impact of disasters and disruptions is unpredictable, we will have to be flexible in responding to actual events as they occur.  With that in mind, we are providing you with this information on our business continuity plan in case an event occurs that causes significant disruption.

    Contacting Us – If after a significant business disruption you cannot contact us as you usually do at 407-629-6477, you should call our alternative number 407-619-5307.  If you cannot access us through either of those means, you should contact the applicable mutual fund or variable annuity company to complete any transactions within your accounts, including investments or redemptions.  The contact information for the four mutual fund families that we predominately do business with is as follows:

    American Funds, 1-800-421-4225, P. O. Box 2280, Norfolk, VA 23501-2280

    Deutsche AM Service Company 1-800-728-3337, P. O. Box 219151, Kansas City, MO 64121-9151

    MFS Service Center, 1-800-225-2606, P. O. Box 219341 Kansas City, MO 64121

    Putnam Investments, 1-800-225-1581, P. O. Box 219697 Kansas City, MO 64105

    Our Business Continuity Plan – We plan to quickly recover and resume business operations after a significant business disruption and respond by safeguarding our employees and property, making a financial and operational assessment, protecting the firm’s books and records, and allowing our customers to transact business.  In short, our business continuity plan is designed to permit our firm to resume operations as quickly as possible, given the scope and severity of the significant business disruption.

    Our business continuity plan addresses: data back up and recovery; all mission critical systems; financial and operational assessments; alternative communications with customers, employees, and regulators; alternate physical location of employees; critical supplier, contractor, bank and counter-party impact; regulatory reporting; and assuring our customers prompt access to their funds and securities if we are unable to continue our business.

    Each mutual fund or variable annuity company backs up client records in a geographically separate area. While every emergency situation poses unique problems based on external factors, such as time of day and the severity of the disruption, we have been advised by the mutual fund and variable annuity companies that their objective is to restore their own operations and be able to complete existing transactions and accept new transactions and payments within a reasonable period of time.  Your orders and requests for funds and securities could be delayed during this period.

    Varying Disruptions – Significant business disruptions can vary in their scope, such as only our firm, a single building housing our firm, the business district where our firm is located, the city where we are located, or the whole region.  Within each of these areas, the severity of the disruption can also vary from minimal to severe.  In a disruption to only our firm or a building housing our firm, we will transfer our operations to a local site when needed and expect to recover and resume business as quickly as possible.  In a disruption affecting our business district, city, or region, we will transfer our operations to a site outside of the affected area and recover and resume business within a reasonable period.  In either situation, we plan to continue in business, direct you to contact the mutual fund or variable annuity company directly and notify you through our customer emergency number at 407-619-5307 how to contact us.  If the significant business disruption is so severe that it prevents us from remaining in business, we will assure our customer’s prompt access to their accounts.

    For more information – If you have questions about our business continuity planning, you can contact us at 407-629-6477.

     

     

  • Mid Year Outlook – Let’s hope the back half is less crazy…

    Dear Friends,

    As we approach the mid point of year 2020, it seems like we all need to catch our breath from the Covid nightmare. Unfortunately, I am not sure we’ll have that luxury given that this is in fact a Presidential election year (and the unemployment numbers still stink too!).

    If you missed our last client conference call a couple of weeks ago, this piece contains a lot of information that Marc Nabi, Portfolio Manager with American Funds, discussed on the call.

    In summary, always remember that recoveries last longer and produce much stronger results then downturns. And most importantly, the active management that occurs on a daily basis inside every fund that you own with us will be a key driver of your investment success over time. After any economic downturn there are always winners and losers among companies – business that emerge better positioned than their competitors. Selectivity will be key moving forward and that’s the kind of activity that occurs everyday with the portfolio managers who are making investment decisions inside each fund you own.

    Don’t ignore the potential for continued volatility – that is a part of it and the tougher the headlines the more that is a factor. Speaking of volatility, let’s not forget about that Presidential election. There is no discernable difference between parties and market direction. Let’s face it – the economy is far bigger than any one person or one political party. Pay particular attention to the headline events that occurred during each President’s time in office. We often forget these historical headlines that, at the time they are happening, feel like the worst case scenario.

    In a week or so you will receive your statements for the second quarter. The good news is that they will look much better than what you saw at the end of the first quarter. At the end of March, the markets were free falling due to the Covid shutdowns and in that first quarter were down about 20%. As of the date of this email, 6/25/2020, markets overall are down about 5% an upward shift of 15% since the end of March. This strong recovery in the second quarter makes the results for the year to date not too bad considering Covid.

    As we have mentioned in previous emails, the office is fully open for meetings either by phone, video or in person. Please know that we do adhere to a universal masking policy for in person meetings and try to have those in-person meetings outside if the weather permits. Who knew those oak trees I planted a decade ago would grow to make a shady outdoor meeting space that we would actually use!

    We hope you all are well. As always please let us know if we can be of any help and if we haven’t seen you in 2020 yet, we encourage you to contact us to set up a review.

     

  • Dear State of Florida Employee

    June 9, 2020

     

    Dear State of Florida Employee,

    2020 is certainly giving us some significant swings in the markets, the economy and our society. The Covid pandemic created the single biggest loss of jobs in history. In response, the markets achieved an incredibly high level of volatility.

    1. Market Commentary

    The volatility in the market created breathtaking swings in account values. At one point, markets were down 34% from the beginning of the year. As of the start of this week markets had shifted up 45% from this low point to be less than 7% from their all time peak in mid – February.

    There are three things that are helping the markets to hang in there despite the widespread Covid shut downs. First, don’t fight the Fed. This maxim has been around for decades and when the Federal Reserve is lowering interest rates and making borrowing easier the markets typically respond positively. Second, don’t fight city hall. When government leaders are providing significant cash relief to both individuals and businesses, the markets will respond positively as well. And third, tech rules the day. The Covid pandemic only accelerated the performance of industry leaders in the technology area and it is these companies that contribute significantly to market performance.

    That’s the good news – but there is always the rest of the story. And Covid is still very much with us and its spread may very well have been compounded by the current level of social unrest as well. In addition, the amount of Americans unemployed is still at a staggering level. Consequently, the markets may be getting somewhat ahead of themselves. Remember though, the best possible investment results are achieved over time by being consistent with one’s approach. If you have any questions about your overall financial picture or investment mix, we are available at any time for phone or video conversations along with on-site visits that follow CDC guidelines.

    1. Our Weekly Podcast & FRS Booklet

    Our weekly radio show/podcast network continues to expand. In addition to the Newsradio Orlando network of stations on 94.1 FM, 93.1 FM, and 540 AM, the live show “Dollar & Sense” that airs every Sunday morning from 9 – 10 AM can now be heard on the local sports network 96 Nine The Game (96.9 FM) which is home to the Orlando Magic and the Tampa Bay Buccaneers.

    To download or listen on-line, follow us on Facebook under Nelson Financial Planning. We are also on a variety of other platforms like Twitter, Itunes, Spotify and many others. Visit our website www.NelsonFinancialPlanning.com to find direct links to your favorite podcast format.

    One of our most recent videos addresses the topic of why you should still continue to contribute to your deferred compensation account despite the Covid pandemic. Be sure to subscribe to our Nelson Financial Planning Channel on Youtube for this and other timely updates on retirement matters.

    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 the 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 Deferred Compensation Accounts. Please be sure to call (407-629-6477) or visit our website www.NelsonFinancialPlanning.com to get your free copy today.

    III. Investment Plan Fund Changes

    Last month FRS announced a change in its FRS Investment Plan Fund options. As of July 1, 2020, the FRS Large Cap Stock Fund and the FRS Small/Mid Cap Stock Fund will become the FRS U.S. Stock Fund. In addition, the FRS Investment Bond Fund will be merged into the FRS Core Plus Bond Fund and the FRS 2015 Retirement Plan Fund will be merged into the FRS Retirement Fund. These changes effectively reduce your investment options which unfortunately continues a trend within the FRS Investment Plan of offering less options. These reduced choices force employees to use more cookie cutter options that aren’t very finely tuned to one’s individual objectives. As for this change, we recommend that FRS Investment Plan participants who own these funds let them automatically transfer to the new funds as there really aren’t any other choices that represent similar investment objectives. Just one more reason why when you do retire from FRS you certainly want to explore your rollover options to an outside IRA in order to broaden your investment mix to more accurately reflect your retirement income needs.

    These investment changes do present an opportunity to review your overall investment mix in your FRS Investment Plan. 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 our January letter, we mentioned some proposed legislation that would have increased the employer’s contribution rate to your retirement. This bill (SB 992) didn’t really go anywhere during the legislative session and wound up being withdrawn. However, the bill was far from perfect as it also forced state employees to increase their required contributions from 3% to 5% over the next few years. Perhaps in the next legislative session FRS employees will get some improvement in their benefits!

    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. 

     

    As always, stay well and please contact us with any questions on any financial matter.

     

    Sincerely,

    Joel Garris, JD, CFP, CFF

    Host, “Dollar & Sense”

  • A rapidly changing world….

    Dear Friends,

    We hope you are all in good health and these market swings over the evolving virus headlines aren’t creating an excessive amount of stress for you. Over the past month, the Dow Industrials has closed more than 1,000 points lower on six occasions and has rebounded at least 1,000 points four times. What started out as daily swings of 3% has now become daily swings of 10%!

    The problem that remains is uncertainty – nobody knows what this will look like in a couple of months, let alone next week – and markets HATE uncertainty. What we do know about uncertain times is that markets always price the worst-case scenario. When the actual data starts to become slightly clearer, markets respond positively with the same speed and vigor they had when reacting negatively to the uncertainty.

    Headline driven events like this virus come out of nowhere. To me, this feels like a combination of two headline driven events (as opposed to economic driven events like the dot com bubble of 1999 or the financial crises of 2008) that I experienced early in my career. The first one was the tied Presidential election in 2000 which resulted in a market drop of 25% in five weeks – nobody likes not knowing who the leader of the free world is after a completed election. The second was 9/11 – just a shocking turn of events that shut the markets down for a week. Coronavirus has the chaos factor, the emotional impact,  and the uncertainty of the future all rolled into one and we believe the markets have already priced a significant economic disruption into the markets.

    But this too shall pass – it always does – both the headline events and the economic events will fade away over time. The seeds of the next bull market are being planted today and our single biggest job is to make sure you stay invested to reap the benefits. Folks, this is where investing gets hard! If it were easy, then everybody would always love the market and never invest in anything else. I always talk about staying consistent as the best strategy that produces investment results over time. It seems like trite and too simplistic advice, but now we all should be feeling how difficult that simple advice is.

    The easy path is always to throw in the towel. Move out and wait as many investors are doing. Except the markets move all too quickly leaving folks out and waiting and undermining performance. If markets move further down, you won’t get in then because that means the headlines have gotten even worse and your nerves will be even more on edge. Your nerves will only calm down and allow you to make such a move once things have gotten better. Of course, the markets will lead the recovery as they always do and then you and your investments results will be left behind. Far too many studies on investor results versus market results over the years come to the same conclusion – investors who move their money in and out of the markets severely underperform over time.

    Clearly given the current state of affairs and governmental recommendations, our client meeting scheduled for March 26 will have a different format than gathering in a ballroom. We are looking into different video and audio options that will allow us to still connect on that day with the latest information so stay tuned on that.

    As for the office itself, we remain open. Our office design lends itself well to “social distancing” since we all have separate rooms and not shared cubicle space. We are wiping surfaces and door knobs down throughout the day and our daily staff meeting has been replaced with check ins by me at each individual room door. Some of you have switched to phone meetings which is a fine option as well, but we are also continuing with face to face meetings with our chairs pushed back a bit more than usual.  Remember the tax filing deadline of April 15 still remains despite suggestions to the contrary. So that means that this tax season has less than 30 days left so if you haven’t gotten us your tax info yet, please do so as soon as possible. Don’t forget, you now have the option to upload your tax documents – just provide us your email and we will send you a secure link to do that.

    As always, we are here to chat about the current environment so don’t hesitate to call us if you have any questions or concerns.

  • 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.