The FRS Investment Option

 

By Glenn J. Downing, MBA, CFP®

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 amount 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...

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Required Minimum Distributions

by Glenn J. Downing, MBA, CFP®

All the rules for Required Minimum Distributions (RMDs) changed with the SECURE Act of 2019.  In this piece I hope to distill the changes.  

Important Ages

There are two important ages in retirement financial planning: 59 1/2 and 72. The former marks the age when you can distribute from your retirement account – IRA or 401k – without paying a 10% penalty on the distribution. The IRS, with this penalty, gives us all a reason to keep our long term savings in place for its intended purpose – retirement income.

The second date is now age 72, and this is the age at which you must begin taking your RMDs from your retirement account. This is a change; the date used to be April 1st of the year after the year in which you turn 70 1/2.  More specifically, if you were born anytime after July 1st of 1949, the new law DOES apply to you.  Born any earlier, and you're still on the 70 1/2 schedule. 

As the name...

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Some Thoughts on College Funding

By Glenn J. Downing, MBA, CFP®

As many of you know, I am a CFP® instructor with Zahn Associates and have been for many years.  As I write I'm reviewing the material for General Principals of Financial Planning, which I’ll be teaching again soon. Part of that course is college funding.

In the context of the material, this section teaches the time value of money calculations. For example, if the client has a newborn who absolutely will be attending Harvard at age 18, how much new annual saving is necessary assuming 5% inflation and 8% earnings? Siri tells me that the full freight now is $78,200. 

Ready for the answer? Sitting down? $18,743.42/year. Something most new parents can do, right?

I personally feel that if I have brought a child into the world, I have a responsibility to that child to give him or her the best start possible, and that includes a solid education. Yet college funding numbers look stratospheric. In this example, one year of college may...

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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...

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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...

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Social Security Benefits

 

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...

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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...

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Goals-Based Investing

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...

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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...

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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...

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