Retirement planning can be confusing and filled with misinformation. How can you ensure you're making the best choices for your future?
In this episode, John Curry and April Schoen, tackle the common questions and misconceptions about the Florida Retirement System (FRS) that many employees face.
You’ll discover…
A surprising truth about why some employees might opt for the Investment Plan over the Pension Plan.
The critical differences in vesting periods that could impact your retirement plans.
Why understanding pension options is pivotal to avoid costly consequences.
Essential steps for coordinating your pension, Social Security, and other financial resources.
How to navigate the complexities of the DROP program for a more powerful retirement strategy.
Mentioned in this episode:
Transcript:
John Curry: Hello, folks. This is John Curry. Welcome to another episode of The Secure Retirement podcast. I'm sitting here with April Schoen and we're going to have a little conversation about the Florida Retirement System here in a moment. But April I want to start off and share with folks why I've had a passion for working and serving the members of the Florida Retirement System.
Back in 1983, I realized that there were really three groups of people in this community. You had the state workers, if you will, members of the Florida Retirement System. You had state employees, you had university system, and you had the business community. And I realized there had to be something in common, and it's retirement. It's planning for retirement.
And I became so energized about that. Then I got to thinking about my grandfather and my father, the mistakes that they made. They did the best they could with what they had. Limited information. DROP was not around back then, but in some cases, they just got bad information. My grandfather retired.
He took option one. When he died, less than five years into retirement, that money died with him. So my grandmother, for the rest of her life, she lived to be 95, all she had was Social Security coming in. So my dad and my uncle had to help her. My dad seeing that because he worked same place, Department of Transportation in Defuniak Springs, he said, I'm not making that mistake. So what he did, is he chose option three.
So he had about 18% less income than he could have had with option one or two, and he had an income stream that he could count on for the rest of his life, and upon his death, know that his wife, my stepmother would get that income for the rest of her life. My dad retired at 62. He died at age 85. My grandmother lived to be 85. I mean my mother lived to be 85.
So she benefited from that, but along the way, they both could have had more money with different planning. So which man did the planning properly? It's a matter of opinion. Some people say, you take the maximum and you take that chance. Other people, like my dad, said I'm not taking a chance on that money. I want to know it's there for me. I want to know it's there for my wife.
And I think that is a good way to think about what do you decide to do with retirement. If you're in the Florida Retirement System, or in the pension or in the investment plan, when do you want to retire? And then we work around that. And I'd like you to jump and just talk a little bit about some of the questions that we get and our approach to doing retirement planning because it's pretty different than the average quote financial advisor.
April Schoen: Yeah. In today's episode, we're going to really, John, be going through and talking about, what are the most common questions that we get from clients about FRS benefits. There is a lot of confusion out there, a lot of information, and a lot of misinformation as well. And so we want to cover really, one of those that kind of most common questions that we get from clients about FRS retirement benefits.
We had a new client in last week, and when I had first met with them, we talked about how we know a lot about the FRS benefits. And I made the joke, you know, you could poke me in the rib at two in the morning and ask me what are the four pension options out of the four Retirement System? And I could recite them to you.
John: Absolutely.
April: And he laughed. And then last week, when he was in, we were going through some things, and he had some misinformation about how something worked when it came to his DROP, so we were talking through it, and he goes, aha, I see. You do know a lot about the FRS retirement.
And I said, yes, that's really what we've spent, I know John, for you, coming up on 50 years, and then really for me, working especially with state employees for the last 14, 14.5 years of learning those benefits. So what we like to do is just break down those common questions that we get from clients about FRS retirement benefits. And I think you're going to find this to be very useful for you, and something that you can refer back to when some of these questions come up.
John: And let me make a point here. We're not going to try to give you a dump truckload of information. We're going to keep it brief. And I would encourage you to either have a telephone call with us or come in and have a visit if you'd like to know more, but because we're going to try to give you a big chunk of information here, but we're going to keep it brief so we don't overload you.
April: That's right. That's right. So let's start with the first thing here. What are the differences between the pension and the investment plan? So the first thing I would say I encourage you to do, if you don't know which plan that you're in, you're going to want to double check that with your human resources department or the division of retirement to know for sure which plan that you're in.
But the pension plan, this is a traditional defined benefit plan. So what does that mean? That means that when you get to retirement, you're going to receive a stream of guaranteed income from the state of Florida for the rest of your life. So that is the pension plan. It is a guaranteed income for you at retirement. And then what's the investment plan?
Well, the investment plan is similar to a 401k. It's called a defined contribution plan. This is a retirement account that's in your name, where you contribute and the employer contributes for you. But you the employee bear the investment risk. You are responsible for determining how to have your investment plan invested, making sure that changes are made to that throughout your career as well.
They're not going to automatically do it for you. You have to be proactive in making those investment changes. And you bear the investment risk, because when you get to retirement, yes, you are going to have whatever amount has accumulated in your investment plan, but it's going to be your responsibility for then what to do with that and how to structure it.
John: And the question becomes, can that person manage that money along the way in a way that they have a chunk of money to then create their own pension type income? Or do they just do withdrawals along the way? And that's risky. It's risky if the market is down.
April: Yeah, and contrasting that back with the pension plan, the state of Florida is bearing that investment risk. Yes, you are still contributing. You're required to put in 3% to either plan, but with the pension, the employer or the state of Florida is bearing that investment risk. Now there are vesting schedules on how long do you have to work for the state, have years of service, to be totally vested in these two plans.
Meaning that you're going to receive 100% of the benefits. Well, with the pension plan, it depends on when you started working for the state. If you started working for the state before 2011 you vest in six years. Six years if you started working before 2011.
But if you started after 2011 it's eight years, eight years for you to be totally vested in the pension. And then the investment plan is different. It's one year of service to be vested in the investment plan. Meaning that after one year, if you leave the state, you can take with you 100% of what you have in the investment plan, both what you put in and also the employer.
So what we find is people who start with the state that aren't sure if they're going to be there for a long time, they may choose the investment plan initially because, oh, I don't know if I'm going to be here for eight years or longer, so I'm going to choose the investment plan so I have more flexibility.
John: Or in some cases, we know people who know up front they're not going to be there very long. I'm thinking of an attorney that we've worked with over the years where he knew going in initially he was not going to be there. But surprisingly, he changed his mind three years later and is still under the pension plan.
April: I was just having a conversation with a good friend of mine and my sister-in-law. They both work for the state in different agencies. One is with the Department of Health and one is with elder care, and he said, I'm a lifer. I'm what's known as a lifer. You know, I've been there 20 years, and I don't plan, I'm not going anywhere else, so I'm a lifer. I love that.
So another question we get is, when can I start receiving my benefits? So normal retirement age under the pension plan is going to, again depend on, when did you start for the state. So you want to go back and see when did you start your years of service so that you can know exactly when your what they consider your normal retirement age to be.
And that is going to be when you can start receiving 100% of your full pension benefit, is when you reach normal retirement age. Now if you again are under the pension and you retire prior to that early retirement age, then you're going to have some penalties. What they will do is you can still get your pension, but they're going to reduce it.
So it's important to know when is your normal retirement age and take that into consideration about when you're going to start taking your pension. And then again, with your investment plan, there's not necessarily a magic age for that. It's going to be when you've been vested for one year, but then you also have to take in taxes into consideration.
So with the investment plan, it may not be a plan description saying, oh, this is my normal retirement age, but it's going to also take into consideration taxes. So if you can take money out of your investment plan early, you may have tax penalties. So not a penalty from the state, but a penalty from the IRS. So it's important to keep those in mind too.
John: I think the best thing there April is to think in terms of an IRA. If you take it out before 59.5, same idea from the standpoint of people who are listing when we refer to a penalty, that's what we're talking about.
April: Absolutely. So let's talk a little bit too about what those normal retirement ages are so that everyone can have a good idea what that will look like for them. So if you started with the state prior to 2011 again, that's when a lot of changes were made in FRS benefits. So you may hear us reference that time frame a lot.
But anyway, if you started before 2011, normal retirement age is age 62 or 30 years of service. So 62 or 30 years of service. If you started after July 2011, it's age 65 or 33 years of service. And again, that's going to determine your normal retirement age for the pension. Now, how are benefits calculated under the pension plan?
So a couple things here. One, I would really encourage you to reach out to the Division of Retirement. They do a great job of putting together pension estimates for you, and you could ask them for various scenarios. They can show, I know we're going to get into DROP, but they can show if you go into DROP if you don't go into DROP, how long you worked. So they can do a really good job of helping you calculate this.
But with a pension, the state of Florida has a formula that they use, and the formula is a combination of your years of service. So how many years of service do you have with the state? It's the average of your five highest compensation, like your salary, highest five, and then they have an accrual rate that they use based on your position type.
So years of service, highest five, and then they have a multiplier that they use based on your class. Again, that's why we can do some rough estimates and calculations for clients, which we do. But it is also good to go straight to the Division of Retirement to get those estimates.
And if we think about them, using your highest five years of service, that's why people will work longer in retirement, because when we get towards that end, this is when we're making the most money we've ever made. And it can make a huge difference in that pension. So one of our clients was, they've been working with us for a few years, and he just got a big promotion.
And so this is going to now change their landscape. He was thinking he was going to go into DROP and retire earlier once he hit his 30 years of service, but now he's rethinking that based on this raise. Because now he knows, oh, now I want to get five years at this new position. And then one question we get a lot too, is, can I switch between the pension and the investment plan?
And the answer is yes, you can do that once during your career. So if you're in the investment plan, you can, they call it buying into the pension. You can buy into the pension. This is something you're going to want to get a quote from the Division of Retirement, because one thing you have to know here is, do I have enough money in the investment plan to buy into the pension or not?
And then the Division of Retirement can also give you an estimate if you switch from the pension plan to the investment plan, how much is that? What is that value that they would put into the investment plan for you? So John, let's talk about that for a minute. Why would someone switch from either the investment plan to the pension or from the pension to the investment plan?
John: I've thought about that a lot over the years, and the truth of the matter is, I've had very few people, I think, if I really think hard, I'm gonna say only three people. I may be wrong. Might be three or four that went from the pension plan to the investment plan. And it's rarely done. Because when you start looking at having the guaranteed streams of income, and can I take on that investment burden myself and match what the pension could give?
Most people determine they can't do it. And in our case, we just show the numbers. This is what you have with a pension. Here's the calculation you got from the state, showing what would go into the investment account. What interest rate do you want to assume you can earn on your money? How do you want to invest? And that's a big choice. That's a big decision to make.
But if I know for a fact that I'm going to be leaving early, then I may want to get that money in my lump sum, either cash out and pay the taxes, or I'm able to invest it. And maybe I'm going to be conservative and use a money market fund or treasuries, or maybe I want to go for the home run and invest it.
April: That's right. Yeah. You bring up a great point there. It's the state of Florida has a great pension. No doubt about it. Great pension.
John: One of the best in the country.
April: It's hard to match those pension numbers on the investment side. But I think where I see people that do that too is if they have poor health.
John: Correct.
April: So if they know, okay, I have poor health, my longevity, my lifespan doesn't look so good. My outlook here doesn't look great. Then they may want to switch to that investment plan so that there are proceeds left behind, not just for a spouse, but also kids.
John: Plus they may want to enjoy that money. Think about this for a moment. Most people by now who listen to our podcast know about my cancer diagnosis. Okay, well, if I know that I have a shorter life expectancy, which I now do, maybe I want to take a chunk of money and spend it. And I have. There are things that I'm doing. That money I'm going to spend and enjoy, and that's not on the table as far as legacy. The other legacy needs are taken care of. So I can see people doing that.
April: Absolutely. What about if they want to switch from the investment plan to the pension plan? Why would someone want to do that?
John: Because they want that guaranteed stream of income, but, but timing is critical, because you may not be able to afford it because of the cost. Because what they're going to do with this estimate, they will calculate how much money you've got to have in there and what the cost would be. And again, most people, when they look at it, go, I'm not doing that.
April: I know in 2022 when the market was down, we had several of these conversations quite frequently during that year because the market was down. But then people are seeing on their statement, okay, my investment, or logging in on their account, my investment plan is down. I don't like this market volatility, so I want to switch to the pension plan.
And that's an emotional decision because of what we're seeing happen with the market. So we now want the guarantees. But then that's a tough time to make that switch, because now your account value is down in the investment plan, so you got such a bigger number that you may need to go into that.
John: And if you have money in retirement accounts, you could do that. But what if you don't? What's the buy-in going to be? What's it going to cost you? This is an interesting topic and I'm glad that you chose for us to cover this today because most people don't think about this until they're really close to retirement.
Especially which option to choose. I love working with people in their 30s, they say, well, when should I start thinking about retirement? The day you get the job. That's your exit strategy. You love what you do, but what are you going to do at the end?
April: And that's a great question, too. I get this a lot from clients, too, about when do I have to make that choice on my pension. When do I have to choose? And you have to make that choice on your pension when you go into DROP, which we're going to talk about in a few minutes, or when you officially retire and step out.
So some people think I have to make this decision much earlier, and you don't have to make it until towards the end of your career, but you want to have a game plan way before then about what you're going to do. So one thing too, is, one question we get is, what happens if I leave working for the state?
So maybe I leave, I didn't work the full 30 years, maybe I leave early, or maybe I just left and I go work on the private side. We see that a lot too. So we get questions about what happens to my benefits. Well, on the pension plan, if you're vested, then you don't lose your pension.
So some people think that if they don't work the full 30 years, that they're going to lose their pension, and that's not accurate. As long as you're vested, your pension will stay there. Now you may again need or want to wait until you hit that normal retirement age and start taking your benefit so you get the full benefit, or you can take it early, but they would have a penalty for that.
John: They'd have a reduction in benefit based on the number of years.
April: That's right, and again, so that's for the pension. And then on the investment plan, again if you're vested, you can take your account balance with you. So you can roll it over to another retirement plan. You can roll it over to an IRA. You can leave it in the investment plan.
John: Or cash out.
April: Or you can cash it out.
John: And that's something we should touch on, just for a moment. Why would someone cash out? Well, let's say you have an emergency and you need the money, but let's say everything's good. Tax planning is important here. You know, in 1986 when Congress dropped the tax rates from 50% down to 28, I tried to convince a friend of mine to take a chunk of money out of his retirement plan. He said I'm not going to do that.
Well, he's been dead several years now, but so many times he said, John, I wish I had taken that money out and paid 28% tax instead of the tax rates going back up. So part of it could be if you see that the tax rates are going down, which is not likely, but it could happen again. But if we see that happening, maybe at that point your plan is I'm gonna take a chunk of that money out and enjoy it now and pay less tax.
But that's hard for people to do. And I call that letting the tax tail wag the economic dog because we do everything based on taxes. I'm not a big proponent of that, but I am in favor of taking money out occasionally, paying the tax on it, and enjoy it now if you need it or want it.
April: Yeah, and taxpaying is very crucial. So I know one of our clients, she just retired at the end of August, and she was going to take some money out of her DROP to pay off some debt, and we talked about how, well we encouraged her, can we wait until January?
Because she'd had all her income that she'd earned this year, next year, she's not going to have as much coming in from just the pension. And so we're like, let's wait and do that next year to take advantage of some of that.
John: It's interesting looking at people's faces when you bring up the tax calculator and you show that tax bracket today versus then. It's interesting because I go, I never thought of that. I know because you're you're so focused on a goal, or you're so emotionally committed to it that you're not doing the day the analytics we call it. Looking at the numbers. And of course, you're a geek when it comes to that stuff.
April: Oh I love it. I love it. I really need that sign that says I have a spreadsheet for that. That's totally true.
John: You have a spreadsheet for everything.
April: That's right, I have a spreadsheet for my spreadsheet. So let's talk about the DROP program, what it is, and how it works. So DROP is just for those in the pension plan. And what happens with DROP is it allows you to retire. I'm going to use air quotes for that retire while still working.
So on paper, you've retired, even though you're still going to be working and you still receive your income, your salary. And what happens is the state starts paying your pension into a, it starts accruing into a retirement account on your behalf, and it's going to earn interest. And so while you're in DROP every month, that pension payment, instead of going to you, is going into your DROP account, it's a retirement account.
And at the end of DROP, you're now going to start getting your pension as income, and then you're also going to receive a lump sum. They call that your DROP payout. This is the accrual of all those pension payments while you were in DROP that have been earning interest.
And again, this is going to be in a retirement account, because this wasn't paid to you as an individual. It's going to be categorized as retirement money. Very important to understand how that part works. And you'll have to make a decision about what do you do with your DROP.
Do you transfer it to some type of retirement account, like an IRA or deferred comp, or do you cash it out? So you're gonna have to make decisions about what to do with that DROP payout. And today, you can stay in DROP for up to eight years. It used to be five, but now you have the choice, the option to be in DROP for up to eight years.
One thing to note here is when you go into DROP, that is when your years of service stop. And sometimes there's some miscommunication, misinformation about that because you've retired on paper. Your pension is now starting, so your years of service stop, and also your highest five.
John: Yeah, you've officially retired.
April: Yeah, you've officially retired. So keep that in mind, too. And then on the pension I want to cover briefly, what are the four pension options and how do they work. And just know we have other episodes that go into way more detail on not just the pension options, but all of these topics as well.
So if you're curious and have more questions, go check out our other videos and episodes. But the four pension options. Option one is called life only. That means you get that income for life, but the day you die, that pension dies with you. There are no options to a beneficiary.
So life only. Option two pays you an income for life, but guarantees that that income is going to go to some beneficiary for the first 10 years of retirement. So let's say I chose option two and I passed away after one year, then my beneficiary would receive my pension for the next nine years. One thing to note on option two is when you go into DROP starts that clock. So if I'm in DROP for eight years, and then I fully step out, now I only have two years left of the 10.
Option three is called joint and survivor. We usually think about this for couples. So it would pay me an income for life, and then the day I pass away, it pays the same income to my spouse, or vice versa, if he passed away first, there's no change to my pension. We get both get the same income for the rest of our lives.
John: Just like I described at the beginning with my dad. Same thing.
April: Option four is the one there's the most misinformation and confusion about. Option four says it's gonna pay, it's a joint and survivor benefit, so let's say for you and your spouse, and it's gonna pay you income for as long as you live. But when one of you has passed away, your benefit is going to be reduced down to two-thirds of what you're receiving before.
John: So let's be clear. You and I are married. I've died. You die first, let's say I'm the worker, and it's my pension plan, but you die first. I'll soon get a reduction of a third.
April: Correct.
John: And I've had the, I'll call it displeasure of having to sit down with people during my career and say, look, this is the way the system works. They're not hurting you. They're not taking advantage of you. You made this choice, and it's usually because they saw the higher number.
I'll get this for life. And a guy said this, he said, and somehow the old girl is going to live on less. Well, now it's the old boy living on less. So it's very important to understand these options thoroughly before you sign up for them.
April: Absolutely. It's so crucial, so crucial. And a lot of you may be listening to this. You may have already made your pension option when you went into DROP. And you may be saying, oh, I don't even remember what pension option I chose. We see that a lot.
It's so important for us to understand which pension option that we're under. It's gonna change your retirement plan. So thinking of that, what are some things, John, that people should consider in just planning overall for retirement? Of course, their FRS benefits are going to play a huge part in that. But what are some things they need to consider?
John: The things that pop in my mind, April, are number one, don't just count on the pension to give you the income. Don't just focus just on that. What are the other benefits? What are you going to do as far as health insurance in retirement? Are you going to do Original Medicare with a supplement?
You going to do Medicare Advantage? What are you going to do? So the health insurance side of it. What are you going to do with money that's in DROP? How do you manage that in retirement? Will you need that income or not, or do you want to let it continue to grow to help offset inflation? So many things to look at.
April: Social Security. When are you going to take Social Security? And there's some, there's definitely some planning strategies out there for Social Security, whether you're a couple or if you've been divorced, if you're a widow or widower, there are definitely planning strategies around social security to maximize those benefits.
John: Well, if you think about it, if you're in FRS pension, and you have Social Security, that is two guaranteed streams of income. However, they're going to be reduced at some point without proper planning. And you want to coordinate those two benefits with whatever you've done on your own, whether it be an IRA, deferred comp, DROP, whatever. It's just important to look at the whole picture.
And then the big issue for me, because my health issues, I'm soon to be 72 years old. What is your health situation? Because that may change how you use that money. I guarantee you, my mindset has changed on how I'm gonna use my resources. I'm using more of the money now and enjoying it while I can with the people I want to spend time with.
April: Yeah, you know, we think about this retirement planning and this FRS benefits, we always talk about the retirement planning puzzle, and how we just think of all of these different pieces being part of a puzzle for our clients that are trying to figure out, how do we put it together in the best way possible?
And that's where we come in to help them. And I think about these FRS benefits, and those are those cornerstones, right? Those are those corner pieces. We've got to identify those first and figure out how they fit in, and then where does everything else come in and coordinate as well.
John: Not only cornerstone, they're the foundation. Especially the pension.
April: Absolutely. Well, thank you guys for tuning in today as we are covering these common questions that we get. Really quick, I know we've got a couple other podcast episodes coming in the pipeline where we're going to talk about one episode just on DROP. So we're going to go into more detail about what it is.
How does it work? When should you go into DROP? We're going to do a case study of going into DROP versus not going into DROP, and how does that impact your pension. So be sure to stay tuned to that. And then we're also going to talk about some tax efficiency strategies when we think about retirement, especially for those of you in FRS.
We're going to talk about what we see from a tax planning standpoint from FRS members. What are those common tax planning mistakes that we see? And we're going to dive deep into that piece.
John: I want you to show us how we can pay zero tax for the rest of our lives.
April: If I could wave a magic wand and do it, I would. Thanks you guys for tuning in, and we'll look forward to seeing you next time.
John: It was a pleasure sharing time with you folks.
April: Bye now.
Voiceover: This promotional information is not approved or endorsed by the Florida Retirement System or the Division of Retirement. Neither Guardian nor its affiliates are associated with the Florida Retirement System or the Division of Retirement. This material is intended for general public use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice, make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. If you'd like additional information about our services, visit our website at curryschoenfinancial.com or you can call our office at 850-562-3000. Again, that number is 850-562-3000. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities, Guardian, or North Florida Financial, and the opinions stated are their own. April and John are registered representatives and financial advisors of Park Avenue Securities LLC. Address, 1700 Summit Lake Drive Suite 200, Tallahassee, Florida, 32317. Phone number 850-562-9075. Securities, products, and advisory services offered through Park Avenue Securities, member of FINRA and SIPC. April is a financial representative of the Guardian Life Insurance Company of America, New York, New York. Park Avenue Securities is a wholly-owned subsidiary of Guardian. North Florida Financial is not an affiliate or subsidiary of Park Avenue Securities or Guardian.
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