The FRS Investment Option

 

FRS participants have a choice among two retirement plan options:
The investment option, which is a defined contribution plan (DC)
The pension option, which is a defined benefit plan (DB)
In previous posts, I covered both the FRS Pension Option and the DROP (Deferred Retirement Option Program). In this post, I’m presenting the FRS Investment Option.

The salient feature of any DC plan is the number of contributions that can go into an individual’s account. On the other hand, with a defined benefit plan (also known as a pension plan) there is a pension formula. The inputs are usually based on years of service and average or final compensation. The formula calculates a pension amount that is guaranteed over the pensioner’s lifetime or lifetimes of the pensioner plus spouse. Here, though, I’m focusing in on the FRS investment option, which is the FRS defined contribution plan.

How much money goes in?
ERISA statues define limits to contributions. ERISA is the...

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Taxation of Social Security Benefits

 

Oh yes. Many new Social Security retirees get a big surprise when they learn about the taxation of social security benefits. This started during the Clinton administration. That administration added a formula to the tax code to determine how much, if any, of your Social Security benefit is subject to tax. Previously social security benefits did not count as taxable income at all.

Provisional income
This formula is called the provisional income formula. It boils down to this: add all of your income together – wages, business earnings, tax-free bond income (yes – non-taxable income is included in this formula), IRA distributions – everything – plus ½ of your social security benefit. If the result falls into the following ranges, then that portion of your social security income gets taxed along with everything else:

Married filing jointly
If provisional income is:

  • <$32,000, then no social security benefit gets taxed
  • $32,000 to $44,000, then 50% of...
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Deferred Retirement Option Program (DROP)

 

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 member of the FRS Pension Plan, TRS,...

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Social Security Benefits

 

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, up to $118,500 in 2016.  This means that, on that same amount, your employer withholds $9065.25 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 $118,500, then only the 1.45% Medicare tax is withheld on the amount of your pay north of $118,500 – so you sort of get a little raise in your paycheck.  (Under Obamacare, when you earn above $200,000 the Medicare rate rises to 2.35%.)

By law, any excess of revenue that Social...

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The FRS Pension Option

 

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 both 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 FRS Pension option is a defined benefit plan. I explain this a little more fully in my video(below).

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 participant a fixed income for life, regardless of whether underlying investments do well or poorly....

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Understanding Medicare, Parts A – D, and Medigap Policies

 

Medicare Part A

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.

What’s covered?

Basically, Part A covers hospitalization,...

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Life Insurance Part 3 – Why DOES Life Insurance Make Me Want to Vomit?

It’s not the life insurance product but the process of obtaining it isn’t fun.
Theory 1:
You put the life insurance agent/broker in the same category as a stereotypical 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 trust him.

Theory 2:
You’ll end up purchasing a product – an intangible product, yet – that you know you don’t fully understand. Clearly, this doesn’t sit well. You’re afraid somebody’s pulling a fast one on you. Did I do the right thing? Am I overpaying? What do other companies offer?

Theory 3:
You have a thousand other things to spend your money on that are a whole lot more fun. Eating out. Vacations. Heat tickets. Even saving money and paying bills seems like a better use of...

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401k Retirement Plan Basics

 

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 an 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 2017 is 100% of salary up to $18,000.  If you are age 50 or older, you may be able to make an additional $6,000 “catch-up”...

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Life Insurance Part 2 – Why Whole Life Insurance is Like a Philip’s Head Screwdriver

Brokers vs. Agents

There’s a difference between a broker and an agent.  An agent represents the insurance company, and his job is to sell policies.  The broker, on the other hand, represents the client, and shops the insurance market to find the product most suited to the client’s specific needs and goals.  From the broker’s point of view, there is no good or bad policy – just unsuitable policies.  Here’s an example:  I’ve just finished painting a bedroom, and it’s time to put the switch plates back on the wall.  I ask you to hand me a screwdriver.  You pass me a Philip’s Head driver, and I need to send home a slotted screw.  Does this make the tool you handed me a bad tool?  Of course not – just the wrong tool for the job.  This is why whole life insurance can be like a Philip’s head screwdriver – because too often agents sell it as the be-all and end-all solution to...

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What is a 457 Deferred Compensation Plan?

 

This deferred compensation plan 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 accounts 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 $18,000 in 2017.

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 unrelated limits: You can defer $18,000...

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