Should I take the FRS Pension or the Lump-Sum (Investment Plan)?
This is a common question we get from our clients here in Florida. Pension or Lump-Sum?
The Steady Guaranteed Income of the pension can be attractive however it comes at a cost of lower upside potential, weaker inflation protection, and lack of beneficiary wealth transfer options
In this article, we are going to discuss some of the items you should consider when choosing the Lump-Sum and invest or Take the FRS Pension
Define your Retirement Goals
Before making a decision, define how you want your dream retirement to look like. How much are your expenses going to be?
With your desired retirement in mind, the next step will be, structuring your retirement planning process in order to meet those goals. One of the most important things when setting up a retirement plan is not only to accomplish your retirement goals but not running out of money in the process.
This is a big fear many retirees have and that’s why sometimes they choose the Pension instead of the Lump-Sum. However, rushing for the Pension without getting all the numbers right can certainly limit you from the potential you could accomplish with a well-structured retirement plan.
There are many questions you have to ask yourself before making a decision. Do you want to leave a legacy to your heirs? Do you want to add another income stream to your life?. In case that you don’t want to leave any legacy to your heirs, and you prefer the monthly payments instead, is the Pension still right for you? Let’s test it with the following formula:
Calculate what makes sense
A good calculation when deciding whether to receive the pension or the Lump-Sum is comparing them to each other, using the following formula. Divide your annual pension amount by the Lump-Sum they are offering you. For example, a 30k-a-year pension divided by 600k Lump-Sum offered would be equal to 5%. In this case, taking the Lump-Sum might be the smartest path to take, the reason being that you can utilize those 600k and just withdraw 5% annually for the next 20 years and create your own pension plan, so in the case of death before those 20 years, you’ll still have some assets left to leave to your heirs. And remember this is just a worst-case scenario, and it would only happen if you withdraw the 5% from the 600k every year without investing the principal.
So, in conclusion, a really good rule of thumb will work to do this calculation and see if the number you get is below or above 6%. Does this mean that if it is a higher number you should take the pension? Well, quite not, remember that one of the challenges retirees face is not only running out of money but also their money running out of purchasing power (inflation). So besides planning for you to never run out of money, it is as important to plan for the preservation of your wealth and protect it against inflationary risk.
What’s the FRS Pension doing with your money?
The FRS pension fund is investing the money in a diversified portfolio of professionally managed stocks, bonds, and alternative assets to create long-term growth so that they can pay out your pension. The main benefit is that if you hire a professional advisor to do this you can keep the profits that you earn above the rate of return needed to deliver your income stream.
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An important question that you have to ask yourself is. Can you work with an advisor to create a disciplined strategy and stick to it through good and bad times? If you answered No then it won’t matter if the numbers say that you should take the Lump-Sum. If you answered Yes then creating your own Pension fund can make sense.
There are different types of risk levels when investing, however, as low the risk is, there will be some type of risk associated with any investment, whether is a market, business, liquidity, horizon, reinvestment, or inflation risk. You will always be exposed to some type of risk, however, with an experienced professional you can mitigate most of the risks associated with investments, and focus on growing your money.
Change of Legislation Risks
Another great risk when choosing the Pension is that any change in legislation can affect your defined benefit pension. They can do what is called a hard freeze, which basically means that new employees won’t be covered by the plan, and current employees covered by the plan won’t see their benefits increase anymore, which can be really bad if you have some years left to retire.
Something similar is happening to the Florida Retirement System, where they want to eliminate the Defined Pension Plans and create a 401k-like plan for new employees. Nonetheless, this won’t affect old workers, because they would still be able to choose between the pension or Lump-Sum, you should be aware that they can reduce your pension if they want to.
What are the Advantages of choosing the FRS Lump Sum?
One of the biggest advantages of managing your money with a professional is the potential to receive all the market returns to yourself. When you have the pension fund to manage the funds for you, you will only get the fixed amount specified of your pension and not more than that. It doesn’t matter if the market goes up or down you will always get the same.
A common misunderstanding that we see people make is that they believe you’re either in the pension that’s safe or your in the stock market that can be “Risky” however there are diversified All-weather balanced strategies that can navigate markets with much less volatility than 100% stock portfolio. These managed strategies are still able to generate income & growth which can help you live the retirement of your dreams.
Check the Florida Retirement System Investment Plan
Finding a Reliable Investment Advisor
Since we talked about the risks associated with investments, it is highly important that you find a reliable and experienced professional to manage your investments for you. When looking for a Financial Advisor always remember to look for CFP which is the highest accreditation in the industry for Financial Planners. This will help you find the peace of mind that you need in retirement as well as meeting your desired goals.
Work with a person that listens to your needs and can create not only one but different scenarios where you can meet your retirement goals.
Whether you decide to go for any of the two options it is important that you can get the numbers right, develop a plan and stick to that plan so you can ensure an amazing retirement. Here at Barnett Capital Advisors, through the years we have created different strategies that you can utilize in order to figure out what is the best decision for you. We can help you answer your questions and build you with confidence to enjoy your retirement without any worries.
When you retire it is important to put your wealth to work for you and give you that desired retirement that you want to share with your loved ones.
Contact us and Schedule A Complimentary Meeting with Our Certified Financial Planner. During the initial meeting, We can show you the balanced all-weather Strategy that can help create your own Family pension fund and Keep the profits to leave a legacy and enjoy the fruits of your labor. We can help you make the best decision for you and not the FRS.