State of Florida Employees

The retirement foundation for State employees is the State of Florida Retirement System, better known as FRS (Florida Retirement System). From police to firefighters to teachers along with a large group of many other employee classifications, state employees who are full-time qualify for this retirement benefit. Offering two pension choices known as the Pension Plan, which is a defined benefit plan and the Investment Plan, a defined contribution plan, employees must understand the benefits of each. Which one is best suited for the employee and why?

In planning for your retirement after working for 25-40 years in the state system, a financial and mathematical approach should be taken before making any decisions. Regardless of which plan you select, there will be substantial money that you will most likely transfer into a qualified account (IRA) when you retire. Along with this money, you may also have 403(b), 457(b) or even 401(k) qualified money.

On the Pension side, you must select from one of four pension choices, each offering a lifetime pension with certain income limits and duration. In addition, on the pension plan side, people can participate in the DROP Plan. The Deferred Retirement Option Program (DROP) provides an alternative method for payment of your retirement benefit for a specified and limited period.

On the Investment Plan side, you own your total accumulated value of your pension assets. During your time in the system this money is invested among a list of state-provided mutual funds. At retirement, you can roll over the entire account into an IRA. Since you own this money upon your separation from service, there are no pension options to select. Again, much care must be taken before selecting a pension option for your retirement. Another option for state employees is the Self-Directed Brokerage Account. On January 2, 2014, the FRS Investment Plan began offering members access to a Self-Directed Brokerage Account (SDBA). This option allows members access to different investment choices in addition to the Investment Plan’s investment funds.

Employee Concerns

The number one fear found among retiring employees in this country is the fear of running out of money. This is not a statement to take lightly. Too often people make retirement decision based on the following reasons:

• This is what my boss, colleagues, coworkers are doing, and they really know this stuff, so I am going to do this too!
• I spoke to my accountant, insurance agent, and they recommended “X”
• I plan to use the same investments going forward because I think I am alright
• I plan to do it myself

Thinking About Retirement Income

In most cases, your retirement income will be significantly less than when you were working full time. For special risk employees, whose retirement assets may be higher, assuming that you will have enough going into retirement without understanding the impact of the market, risk/volatility, fees, etc. must be addressed carefully. Consider the following:

• Remember that your choices going into DROP or retirement are irrevocable
• Pension Plan Options limit your choice, income, and death benefit
• DROP interest today is 1.3% (low)
• Understand how risk/volatility impacts your investments. (403-b, 457-b, 401- k, brokerage accounts)
• Fees must be carefully understood. Do you really know your investment history during the past 20 years?
• Learn about your retirement “Three-Legged Stool” and how to maximize your retirement.
• Going into retirement and having your assets affected by the market while taking income is a major reason people outlive their retirement.
• Risk, up-front fees, ongoing cost, internal expenses and performance are key to the real value of your investments. Be careful!
• Inflation and taxes must be taken into consideration as a direct impact to your account durability.
• Health issues may significantly impact your life’s savings. Protecting your income against this is very important.
• Beneficiary benefits: There are very significant differences between the Pension and Investment Plan when it comes to beneficiary benefits. Understanding these before selecting is important.
• Taking your DROP or Investment Plan money and immediately paying off your mortgage balance, paying off debt, purchasing your dream home, or home improvements may impact your retirement. Remember, retirement is for the rest of your life. Work with an Investment Advisor before making these financial decisions.

Additional Information

As an example, a state employee retiring at age 62 with 30 years of service averages an Option 1 benefit of 46% of their normal salary! Make sure all factors in your life are in alignment for retirement. Also remember that Option 1 provides the highest lifetime payout; however, it is a payout for your life only! What if you are married, have dependents, etc.? A death would terminate Option 1. DROP today earns 1.3% per year. Is it worth going into DROP for five years? The typical decision is to purchase a large term life policy when selecting the Pension Plan and Option 1. Knowing exactly how this can compare to the entire choices available today with the FRS Retirement Plans may have you rethink this choice.

What about the FRS Investment Plan? Wouldn’t allowing you to have complete access to your accumulated value be a benefit in retirement instead of a limited income on the Pension side? Would you consider creating an income for life with part or some of your Investment Plan assets that would not run out upon your death or your spouse and have the remaining balance go to your beneficiaries? What if your retirement income could double if you had long-term care needs?

Would you have more choices in retirement if you had total access to your Investment Plan assets, and could create a financial plan that would be specifically designed based on your goals without the limitations of the state Pension Plan?

How about learning how to incorporate actively risk managed investments designed for retirees that take a direct risk approach in your retirement portfolio? Today, the Investment Plan offers additional investment options via the Self-Directed Brokerage Account. One of your options provides a tactically active risk managed portfolio designed to capture the upside earning potential of the market and move into a position of safety when a market downturn is identified. Exploring this option makes sense as well.

Learn more about the FRS, along with all your total assets, savings, spousal benefits, etc. Include a balance sheet-budgetary review outlining your obligations as you go into retirement. How and when should you include Social Security? What about your current home, its value, and outstanding balance? How does your health impact your retirement?

Even if you have had a financial gameplan and professional review, allow yourself this opportunity to mathematically review your current position right now!

Contact our office for a comprehensive, complimentary and confidential review of your current financial position and an FRS analysis.