On this week's episode, we speak about properly planning your secure retirement based on your personal financial situation. John explains the four FRS options, what they mean, and how each is designed to suit a specific situation.The discussion, while aimed specifically at members of the Florida Retirement System (FRS), gives valuable insights to anyone in the process of planning their retirement.
“Some people choose one of the four options in a vacuum. They're all good, but they're designed for different purposes. Now, the challenge is taking those four options and coordinating that with Social Security, your deferred comp, your IRAs, drop money, savings investments, and your life insurance. All that has to be reviewed as a total package in order to have a comprehensive retirement plan that will last you for the rest of your life. That's what I want to make sure that anybody listening understands. This isn't just about which of these options you take, it's about the total picture,” says John.
We chat about secure retirement plans, as well as:
The four Florida Retirement System pension plan options
Making an informed choice
Scenario planning: how long does your pension need to last?
The difference between pension and investment
When contributing to pension is not in your best interests
And more
Listen now…
Mentioned in this episode:
Transcript
Steve Gordon: Welcome to John Curry's Secure Retirement Podcast. My name is Steve Gordon and I am the temporary host. I'm here with Mr. Curry himself in the flesh. And we are in our second episode where we are going through some specific planning around the idea of retirement for the Florida Retirement System and members of the Florida Retirement System. If you're in the Florida Retirement System, this is going to be specifically geared to you.
If you are not in the Florida Retirement System, you are going to gain things out of this that I think will be valuable for you as well because many of the topics that affect FRS members also affect everybody that's going to retire. And so if you missed that very first episode, you can go back and listen to that on John's website, johnhcurry.com or in your favorite podcast player. So, Mr. Curry, good to see you again.
John Curry: Good to see you, Steve.
Steve: So today we are really kind of diving into the meat of things. And we're talking about the FRS pension options. So set the stage for us. What are we going to cover today?
The Four FRS Options
John: I always like to start with the basics. There were four options under the Florida Retirement System pension. There's a lot of confusion about them. There's a lot of changes that have happened over the years in 2011, legislature made some more changes that impact people. But I'd like to start with the very basics and just share some tidbits of information that many people don't know. The Florida Retirement System was actually created back in 1970. At that time, the legislature brought all the existing plans together.
There was something called the Teachers Retirement Plan and the State Employees Plan. So they just merged them. At the time it was contributory, meaning you had to contribute some of your own money. 1975m it became non-contributory, meaning the state of Florida totally funded everything. And I remember talking with people that I've known for years in the Florida Retirement System, including my dad, saying, Wow, this is fantastic.
You know, I don't have to make, pay anything into it. And then in 2011, that changed and employees now have to contribute 3%. And then the state contributes their portion, which we'll get into later. But I find it interesting that it's been years, I mean, many years since I had anyone who had taken the time to read and study and really understand their pension.
I'll have people come to me, Steve, within six months of retirement, they've never read the FRS employee handbook, they've never read the plan, just some of the description about the plan. Now, I know I'm a little unusual because I eat, sleep and drink anything related to retirement. I do. I admit it. I'm a geek about it. But I would think that if either take the time to learn it or go find somebody who knows it inside out and hire that person, or persons to help you. So I love this. I have a passion for it.
And I touched on it last episode, but I'll hit it briefly today. My grandfather took option one. So I'm gonna explain option one. Option one is the maximum benefit. You get that check for as long as you live, the day you die, it dies with you. So my grandfather died, that pension died, my grandmother got no more money for the rest of her life until she was almost 95. So that's an expensive option if you don't live a long time. Well, I'll cover all four and I'll come back to that.
Option two, a little different. It also is a lifetime benefit but it has a 10-year guarantee. Life to the employee, 10 years to the beneficiary. So had my grandfather taken that one, he died about five years into retirement, my grandmother would have gotten the income five more years and then it would stop. Option three is joint with 100% to the survivor. That's what my dad took. My dad took that option, so it's less income, he had about 15% less income than he could have had with the top one, maximum.
Steve: I want to stop you right there and talk about this a little bit because I know that the experiences of both your father and your grandfather really are what drove you to do what you do today. As I listened to it, it sounds like your grandfather took one option, your father probably looked at that as an example of what not to do and went completely the opposite. 180 degrees.
John: He did. Totally opposite.
Steve: And that was a little bit problematic as well. And share a little bit about that story and maybe why just looking at the surface can create problems.
1, 2 or 3?
John: Well, I'm gonna be as simple and direct as I can. My grandfather saw option one as being the maximum of money and he simply said, I'm healthy, I think I'll live a long time, I'm taking the maximum and he didn't give a whole lot of thought to what happens when I die. He had very little life insurance, less than 10,000. So he had a different mindset. Some people have a mindset, I'm absolutely going to protect the people that I love and care about even though I get less money. My grandfather didn't have that mindset.
He was like, hey, dammit, I want every dollar I can get. My dad had a different mindset. When he saw and he had to reach into his pocket and help his mother every month, along with his brother, he said, I do not want my sons to have to do that for their mom. So he settled for less in order to guarantee her lifetime income. So it comes down to a mindset fee. And also, are you willing to listen and take advice? My dad and my grandfather were very stubborn men. They didn't take much advice. And they were skeptical. And so they didn't get the advice that they could have gotten.
Steve: Well, you know, the way you describe that, it makes it sound as if one of those two options is just inherently better than the other. And I don't think that's necessarily the case.
John: It's definitely not the case because maybe I have enough resources that I can take the option. So back up. If my grandfather, let's suppose the head just a big old life insurance policy in place when he retired, he could have taken the maximum benefit knowing that if he died two days later, that the life insurance would take care of my grandmother. He didn't do that. Now somebody does not have life insurance, they don't have a lot of savings or investments, then maybe taking option three is better. So in my dad's case, he made the right decision. It could have been better, but he made the right decision based on what information to hand.
Steve: But I think that's what I want to make sure that anybody listening understands is that it isn't just about which of these options you take. It's about the total picture. And so that's what we're really going to get into.
John: Absolutely. And we'll talk about it some today in the sense that I this episode because some people choose one of the four options in what I call a vacuum, okay? Which one is the best? Well, neither is the best. They're all good. They're designed for different purposes. That's why they're there.
But now the challenge is, how do we take those four options, coordinate that with social security, your deferred comp, your IRAs, you know, drop money, if you have that, savings, investments, your life insurance, all that has to be reviewed as a total package in order to have a comprehensive retirement plan that will last you for the rest of your life. Most people listening to this when they retire, they'll probably live 20 to 25 years or longer in retirement. We're living longer, so what if you live 30 years in retirement. Plan better work.
Steve: I think everybody would agree. It better work. So get us back on track here because I, thank you for kind of pausing and clarifying that but get us back on track with the pension options.
Long Term Planning for Yourself and Your Family
John: Okay, let me just summarize them real quick. So option one is life only. Meaning, if I take that option, I get it as long as I live. Live to be 100 years old, I get that check. And depending upon when I entered the Florida Retirement System, I might have a cost of living benefit. At one time, it was just a flat 3%. July 1, 2011, that changed. If you are a new hire coming in, you don't have a cost of living benefit in retirement. I find people don't know that. Sure, I have it. No. Read the plan document. If you were hired on or after July one of 2011, there is no cost of living benefit for you when you retire.
People who have been there for a while instead of getting automatically 3%, it's been scaled down. So I just met with a client yesterday, 2.4% will be his cost of living benefit based on a factor. So each of these options will have a cost of living benefit. Prior to 2011, nothing ever. So option one, get that check for life, the day I die, nothing. The only thing that would come back to my family would be any contributions I've made into the plan. Option two life also for as long as I live, but 10 years guaranteed to the beneficiary, typically a spouse.
So I'll live five years, I die income continues five more years. And again, if I die, 10-year guarantee but nothing after the 10 to the beneficiary. I've had people say I'm not taking that option. My dad said I'm not taking that option because I only get it for 10 years. I said, dad, that's not accurate. You get it for life. Mom is the one that will be hurt after 10 years. He didn't know that. And then option three is called joint life with 100% to the survivor. So my dad took that option, so the check he was getting lifetime.
The day he died, that same dollar amount continued to my mother until she died. When both die, there's nothing left. So it's all gone. Because the state of Florida is investing that money to guarantee income streams for two lives. And then the fourth one is joint life with two thirds. A lot of confusion on this one. So the two thirds, I get the check, I die, my wife gets two-thirds of what I was getting, okay? What people don't know, is if the spouse dies first, you also are reduced down to two thirds.
I've had people come to my office angry, you know, the state of Florida misled me, division retirement misled me. I said, No sir, they did not. It's in bold print right there. What happened is this, you saw that that benefit was greater than option three, less than two and you locked on it and took it thinking that upon your death, she gets to live on less. But you didn't ask the other question. If she dies first, can you live on this? And it's pretty sobering when you have to have that conversation. Maybe I can help you.
Maybe we can do a little rescue plan here, talk to him about your other assets. But those are the four options. And some people say there should not be a pension plan. And I'm convinced that the day is coming when you're going to find that more and more pressure is going to be on the states to get rid of a pension plan and have more of what we have now with the FRS investment plan. So a new hire, you're hired today, you can do the pension plan or the investment plan.
If you know you're not staying until you're vested eight years, you might want to take the investment plan because I'm leaving in a year or two and not do the pension. But corporate America went there a long time ago, back in the 80s. They said wait a minute, we're gonna give up the pension plan and have a defined contribution plan called a 401k. And all retirement plans come under two categories. It's either a defined benefit plan, like the FRS pension or a defined contribution.
Let's spend a minute on that. And defined benefit is based on a formula based on number of years of service, what was my income and a factor. So I get a percentage of my income paid out to me. A defined contribution plan, like the FRS investment plan, or a 401k, that's different. That's based on how much money went in. And whatever chunk of money is there at the end of the rainbow, I, the employee have the pressure and the burden of handling that to make sure it lasts me forever. So the pension is good because it takes away all of the investment decisions for you.
Because the State Board of Administration does all the investing and they're responsible for backing up the income. Now, 2008 pension, all pensions took a big hit. Today, there's worry that pensions are what we call solvent. Are they actuarially solvent, meaning can they meet the obligations into the future? And I can't speak for the state of Florida. I can't speak for the State Board of Administration. But I think they're doing a good job. And I think people who dig deep into it will see that our pension plan for our state employees in Florida is better than most. Very solid.
Steve: I'm sure that'll be comforting to people who listen to this. So as we look at the various options, is there anything else people need to know? Anything else you want to cover here today?
Making Sure the Plan is Solvent
John: Well, just a little bit, not much about the contribution. I have people who come in and they're angry that they're having to contribute 3% to the pension plan. And I'm trying to help people understand. Personally, I think we all should have to contribute. You got to have a little bit of skin in the game. That's the way I see it. But it's so easy if you've not done something and all of a sudden you have to pay into it, we complain.
And we all do it, you know? But just understand that that's just another way of making sure the plan is more solvent to take care of not only you but the people behind you. It's important. And I would say this, final thoughts on this topic will simply be I have in front of me right now, the plan document. It's very complicated. I mean, there's formulas for it. What percent do you get when you retire? You know, should you retire early? Should you wait until the maximum?
And it's not unlike social security. We'll get to that. But I would simply say, Steve, that it's not just looking at four numbers on a piece of paper when you get your estimate, and say Oh, I'm going to pick this one. You can do that. I think that's a mistake. It should be part of a comprehensive retirement income plan, not just a retirement plan. And I like to do what I call a retirement rehearsal for my clients. We take every stream of income you got, we put it into our model, we project you out to age 100, and see how it works. I think that's a better approach. But each person has to make their own choice.
Steve: I want to do two things here before we wrap up. One, I want to give folks a little bit of a preview for what's coming next. And I also want them to know how to get in touch with you if they've got questions. So, what do we have coming next in the series?
Coming Soon...
John: Well, I think the next thing we want to cover is going to be should you defer money. Should you be in the deferred compensation plan, sometimes called a 457 Deferred Comp, or 403 b if you're in the school teacher of the university system? I think it'd be fun talking about what happens in the future. You know, we're all programmed to think that when we retire in a lower tax bracket, so I'm going to talk about some of that.
Okay, great. That's perfect. So we'll cover that next time. Where can folks get a hold of you if they've got questions? Maybe they're having to make these decisions right now? Well, they can reach me at my office at 850-562-3000. I'll repeat that, 850-562-3000, or the website, johnhcurry.com. Johnhcurry.com.
Steve: Perfect. Well, my friend, thank you again for sharing a little bit of your insights and wisdom with us. And we will be back folks, with another episode in this series talking about deferred compensation. Doesn't get any more exciting than that, does it?
John: Well, it's nice to have the compensation. And you're going to need it deferred so you can enjoy it later.
Steve: That's right. That's right. All right. Thanks, everyone.
Voiceover: If you'd like to know more about John Curry's services, you can request a complimentary information package by visiting johnhcurry.com/podcast. Again, that is johnhcurry.com/podcast. Or you can call his office at 850-562-3000. Again, that is 850-562-3000. John H. Curry, chartered life underwriter, chartered financial consultant accredited estate planner, masters in science and financial services, certified and long term care, registered representative and financial advisor of Park Avenue Securities LLC.
Securities products and services and advisory services are offered through Park Avenue Securities, a registered broker-dealer and investment advisor. Park Avenue Securities is a wholly-owned subsidiary of Guardian. North Florida Financial Corporation is not an affiliate or subsidiary of Park Avenue Securities. Park Avenue Securities is a member of FINRA and SIPC. This material is intended for general public use.
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