Deferred Retirement Option Program (DROP)
By Glenn J. Downing, MBA, CFP®
The Deferred Retirement Option Program (DROP) is available to Florida Retirement System (FRS) pension plan participants. As a DROP participant, you earn your salary while your monthly pension is paid into the FRS Trust Fund. You earn interest at the rate of 1.3% on those DROP funds. This money adds up quickly. If your pension payment is $5000/month, your ultimate DROP payment will approximate $310,000!
This is a rich retirement – there’s nothing remotely like it that we’ve see in private industry.
Before you participate in DROP, you earn one month of retirement service credit for each month you work. When you enter DROP, you are considered to be retired and your pension is frozen at that level. You will still benefit from the cost of living increases, however.
Who is Eligible to Join DROP?
To participate in DROP, you must be vested and eligible for normal retirement (based on your years of service or age). You must be an active...
Life Insurance Part 1 – A Little History
by Glenn J. Downing, MBA, CFP®
The fundamental reason to buy life insurance is that someone else is depending upon you for a living. Plain and simple. It is risk transfer: in exchange for premium dollars, the insurance company will make a payout at your demise.
The life insurance industry is one that responds to market demands. In Part I of this series I’m going to give you a little history. What kind of policy should you buy – term? whole life? In Part II I'll discuss the other jobs life insurance can do for you, and talk a little about underwriting. In Part III I'll examine some common reasons for procrastination.
Yearly Renewable Term Insurance
Original insurance contracts were for one year only – term policies, in other words, which renewed each year. As the insured ages, year-by-year the premiums would rise, reasonably enough, as one’s mortality age comes closer. So fundamentally we...
Finally! The Government Pays YOU!
By Glenn J. Downing, MBA, CFP®
This blog post is actually the first of a trilogy having to do with Social Security. The second is about the Taxation of Social Security Benefits, and the third is, Will Social Security will be There When I Retire?
The Social Security benefit program is officially called OASDI – Old Age, Survivor, and Disability Insurance. As the name suggests, it consists of two parts – the disability income part, and the retirement income part.
Funding for Social Security
The program is funded by payroll taxes under the Federal Insurance Contributions Act (FICA): 7.65% of your gross pay, matched by your employer, on your earnings up to $137,700 in 2020. This means that, on that same amount, your employer withholds $10,534.05 from your pay, and matches that amount equally. Technically, the social security amount is 6.2% and the Medicare amount is 1.45%, and these total to 7.65%. If you earn more than...
Life Insurance Part 3 – Why Haven't You Bought the Coverage You Know You Should Have?
by Glenn J. Downing, MBA, CFP®
If you dropped dead tomorrow your family would be in a world of hurt. You know this. Yet you haven't purchased life insurance. Why not? Before you get into it, check out Part I and Part II of this 3-part series.
Why Haven't You Purchased Your Life Insurance?
Theory I
You think you have enough insurance coverage through work. Do you know how much is there? Typically anywhere from $50K to $250K. Is that anywhere near sufficient?
Theory II
It isn't the product that bothers you but the process. You put the life insurance agent/broker in the same category as a stereotypical used car salesman. He’s got greasy hair, you’re his newest best friend in the world, and he wants to know, What do I need to do to get you into a policy today? You think he’s out solely to earn a commission. You have nothing against anyone making a living, but you just don’t...
How Much Investment Return Do I Need to Make?
by Jonathan G. Cameron, CFP®
Having great investment portfolio returns may not get you to your retirement goals. You could have (in theory) spectacular returns every year for 20 years and still not realize the retirement you want. Do we like strong investment performance? Sure. Should stellar performance be your goal? Not necessarily. Goals-based investing should be the approach. The investor starts from the endpoint and works backward toward today.
What is Goals-Based Investing?
In doing retirement planning, first begin with the lifestyle you want to enjoy. Then figure out how much it’ll cost you. Then evaluate your current investments to see if they’ll do the job. Your portfolio return in this approach becomes the means, not the end. In other words, start with your goals, figure out how much it’s going to cost you, and determine how you should invest to accomplish those goals.
Performance-Based Investing
This approach is very different from performance-based...
Understanding Medicare, Parts A – D, and Medigap Policies
By Glenn J. Downing, MBA, CFP®
Original Medicare is a creation of the Johnson administration in 1965. Medicare is health insurance for those aged 65+. There is a premium associated with coverage, and this premium is deducted from the Social Security Benefit. As with any government program, there is nothing easy to understand about Medicare. In this blog entry, I’ll cover the highlights.
Medicare vs. Medicaid
Please don’t confuse Medicare with Medicaid. Medicare is health insurance. Medicaid is a state welfare benefit, though partially funded with federal dollars. The Medicare beneficiary is age 65. Someone who has been receiving social security disability for more than 2 years is also covered. Coverage is for individuals, so a retiree of age 65 cannot cover his spouse of 63 on the same policy. This spouse will have to wait two more years to elect coverage.
Medicare Part A
Basically, Part A covers...
The FRS Pension Option
By Glenn J. Downing, MBA, CFP®
Employer-sponsored retirement plans can be split into two groups:
- Defined Contribution Plans, or DC Plans
- Defined Benefit Plans, or DB Plans
As the name suggests, the salient feature of any defined contribution plan is the input – how money goes into the plan. Money goes in from employer contributions and matching, employee deferrals, and forfeitures from those not vested.
On the other hand, the DC plan is defined not by the inputs, but rather than by the output. The Florida Retirement System pension option is a defined benefit plan. I explain this a little more fully in my video.
The Investment Risk is With the State - Not You
With any defined benefit plan, all the investment risk is with the employer and not the participant. When I say the risk is with the employer, I mean the State of Florida. FRS invests the retirement plan assets in such a way that it is able to pay out what has been promised. The employer is guaranteeing the...
401k Retirement Plan Basics
By Glenn J. Downing, MBA, CFP®
It used to be the case that you went to work for one employer and remained with that employer for the entirety of your working life. You received a pension from that employer when you retired – in other words, you continued to get paid a lesser amount even though you’d stopped working.
This arrangement is no longer the norm – people expect to change jobs several times during their working lives. A 401K retirement plan suits this kind of work environment. When you leave one employer, you can move your 401K funds into the 401K of your new employer, or over to a Traditional IRA. In any event, the responsibility for providing a retirement income lies firmly with the worker!
How much can I contribute?
Contributions are limited by IRS regulation. The maximum deferral that a plan participant can make in 2020 is 100% of salary up to $19,500. If you are age 50 or older, you may be able to make an...
Life Insurance Part 2 – Uses Of Life Insurance Policies
by Glenn J. Downing, MBA, CFP®
In Part I of this 3-part series I gave a brief history of the life insurance industry.
Here in Part II I'll go over the main applications for life insurance policies. Next, in Part III, I'll discuss some of the behavioral issues in obtaining coverage.
Uses of Life Insurance
So what are some of the uses of life insurance? First and foremost, a death benefit to one’s survivors. It is a risk transfer mechanism. If you die before you've been able to financially provide for those financially dependent upon you, the life insurance policy will do so. Other common applications:
To secure a loan
It is not uncommon for a commercial lender to require that a borrower take out a life insurance policy in the amount of the loan payable to the lender.
For tax-free income
Many cash value policies can be structured to be over-funded in earlier years, and pay out a tax-free stream of income...
What is a 457 Deferred Compensation Plan?
By Glenn J. Downing, MBA, CFP®
This retirement savings vehicle gets its name from Section 457 of the tax code. It is a type of non-qualified deferred compensation. The employee defers money into the 457 account on a pre-tax basis. Any growth in the account doesn’t get taxed until it is ultimately withdrawn years down the road, in retirement. Withdrawals are taxed then at ordinary income tax rates.
Where do you find a 457 deferred compensation plan? At government entities, and less commonly, non-church controlled tax-exempt organizations. Consequently, you won’t find a 457 plan at a for-profit corporation.
If your employer sponsors a 457 plan, how much can you put in? Same limits as with 401ks and 403bs: up to 100% of compensation, capped at $19,500 in 2020.
457 Deferred Compensation Plan Coordination & Catch-up
If you have two jobs, one with your city, and another with a private company, you can contribute to both retirement plans. You have two separate and...
