Retirement is the tasty morsel dangled before the long employed worker. Retirement, however, isn’t a simple decision entered into quickly, without doing extensive research and optimally several years of planning.
Many employees who retire have only their social security as their source of income. If they were blessed enough to work for a company or government unit that offers a pension, they have their retirement pension and their social security. Sadly, however, they often find it’s just not enough to maintain the lifestyle to which they’re accustomed.
It’s never too early to plan for retirement. The most important thing to keep in mind when preparing to retire is to have an accurate picture of your monthly needs. Will you have a mortgage, a car payment, a travel fund, a contingency fund or will you have everything paid for and just have basic needs that must be met? There is truly no “one size fits all” retirement plan.
In the state of Florida, if you work for a school district, a county government office, a water management district, etc., you are lucky enough to participate in the Florida Retirement System (FRS). At the current time, there are two options when you’re in the state retirement system. You can be a part of the pension plan or the investment plan.
The Pension Plan is a defined benefit plan (you know how much your monthly benefit is going to be based upon a formula and upon certain decisions you make at your time of retirement). For most people the formula is the number of years worked in the FRS multiplied by 1.6 and then multiplied by the average of your five highest years of salary. Most people make their highest salary during their last few years, so a good rule of thumb is that if you worked 30 years in an FRS job, your retirement check will be 48% of what you were drawing at the time you retired. It takes eight years to vest in the plan (before you are eligible for a benefit). If you were in the plan before July 1, 2011, you were vested after six years. The Pension Plan has been around for over 40 years and is best for those who will be with the FRS for most of their career or for older employees and those who are not comfortable with controlling their own retirement plan. You can choose Option 1 (which is the largest monthly amount) and you will receive that amount until your death. If you live 30 years after you retire, you will draw that amount per month, adjusted annually by the cost of living adjustment (COLA) in place for your service. The downside, however, is that if you die two months after you retire, you only draw checks for two months and no one else is entitled to your retirement. You can choose Option 2 (which will result in a smaller monthly benefit) but it guarantees that if you do not live for at least ten years after you retire, your beneficiary will get your retirement checks until ten years of checks have been paid out. Option 3 and Option 4 provide a reduced benefit to you and your beneficiary, but are not extremely popular Options.
The FRS Investment Plan is a defined contribution plan. Your employer and your contribution amounts are defined by law, but your ultimate benefit depends in part on the performance of your investment funds. You allocate your contributions and account balance among various investment funds. Your retirement benefit is the value of your account at termination. It consists of any cumulative employer and employee contributions, dividends and interest, and investment gains and losses, less expenses. There is no fixed benefit level at retirement. You may choose to take your account balance at retirement as a lump sum payment or to take periodic withdrawals on demand or by a payout schedule you select. The investment plan was first offered in 2002 and was primarily offered to serve shorter service and mobile employees. You will be vested in the investment plan (own the assets) after just one year of service; your own contributions are immediately vested.
It is often best to sit down with an FRS representative or a financial advisor who can guide you into making the choice of plans that work best for your individual needs. Not everyone is comfortable making investment decisions and may have heart failure as they watch their investment values change in value. This type of person would be much more comfortable with knowing what they will receive monthly and so would be best suited for the pension plan. They don’t have to worry about investing with this plan, they can’t outlive their benefits, and they’re eligible for a cost of living adjustment on the portion of their benefits that was based on service earned prior to July 1, 2011. If you’re comfortable making investment decisions and are even interested in getting a lump sum payout that you can continue to invest as you see fit, the investment plan is better suited for you. Your account can grow significantly if your underlying investments do well. You vest much earlier and if you’re younger, your account balance has more time to grow.
The Social Security Administration has said that the average long term worker will earn about 40% of their pre-retirement income in Social Security Benefits. The average long term State of Florida Retirement System member will earn about 48% of their pre-retirement income in retirement checks. So a person who retires with 30 years of service with a State of Florida Retirement System job will receive about 88% of their income in retirement benefits consisting of FRS and SS payments.
Many barriers exist to retirement. High living and heavy commitments make retirement a tough decision for many. We have become a society that has extensive debt. Easy credit abounds. If we’re using credit now to make ends meet or to live above our means, we’re suddenly faced with less income and the need to pay back for spending money we didn’t have. When we’re no longer working, we’ll have more time on our hands that many would like to travel and see the world and experience new things. This comes with a high cost.
People are choosing to work longer to ensure they can adequately take care of themselves in retirement. Social Security is requiring people to work longer to receive full benefits. Full retirement age used to be age 62, then it rose to 65; for those born after 1960, full retirement age is now 67.
It would appear that in order to truly enjoy our golden years, we’ll need more than just our Social Security benefits and our retirement pension checks. It’s never too early to plan for retirement. Each person should set a goal to save at least a portion of each check for retirement purposes. They could put money in a tax sheltered annuity through a payroll deduction that would be pre-tax. At retirement time this could provide another stream of income.
Retirement planning is not an easy task. It involves making plans when you do not know what the future holds. You have to base your choices upon reasonable assumptions. How long do you expect to live after you retire? How much will you need to live comfortably each year? What expenses will you continue to have in retirement (mortgage, property taxes, medical insurance, travel, cars, insurance, etc.)? Though it might come at a cost now to hire the services of a financial planner, it could certainly pay off in the long run. The financial advisor can help you understand the outcomes of financial choices you are making. It might be worth the investment to help prepare you for a truly “golden” retirement.