The Educator's Retirement

Understanding Your TRS Pension

2018-04-27T16:56:00.000-04:00

This morning I had a couple that are clients come to my office to review their potential retirement plan and income. As usual, I asked them to please bring any other account statements, 401k accounts, 403b accounts, last year's tax return, social security statements, and any potential pension documents/calculations they had (we really try to review everything and leave no stone unturned).

While going over each separate item with them, I turned to the wife (whom I had not previously met) to discuss her TRS pension. I had been told in the initial meetings she was an educator and would have a TRS pension, and we even had a rough in-house estimate for the potential pension. I soon came to find out that while she would have a TRS pension, she was actually teaching in a hospital setting and was no longer covered by TRS. Well, suddenly my well researched and reviewed plan was not correct at all.

Why Did This Matter?

The TRS pension system is based on years of service (credits) and the average of your highest two consecutive years of salary. That is it.

If you no longer covered by TRS, want to draw your pension, and are under 60 years of age and do not have 30 credits, then your pension is reduced based on your age.

If you are no longer covered by TRS, want to draw your pension, and are 60 and over, your pension is not reduced. More importantly though, your pension benefit does NOT grow for waiting past 60 either.

My client left being covered by TRS years ago and turned 60 late last year, so while she may have missed a few months of receiving her pension, thankfully it was not too long that she did not receive this benefit. By the way, she promised to call today to get the ball rolling.

Note - The client had an estimated pension benefit from TRS's website showed what her benefit would be at 12/2019 (20 months from now), and it was exactly the same as the one I did for starting in 5/2018. There was a disclaimer at the end of the estimate that it is the former employee's responsibility to start the pension process, and TRS would not pay benefits that were missed by the former employee. Had the client waited until 12/2019, more than two years of benefits would have been lost!

Ramifications

The clients mentioned above are truly wonderful people that unknowingly omitted a detail in our prior meetings. This does not happen often thankfully, but it does clearly state the importance of understanding all of the various benefits you have and/or disclosing everything to your financial advisor for them to help you get all of the benefits.

Who Is Looking Out for Your Best Interest?

2017-12-30T12:26:00.000-05:00

One of the most common questions that I receive is about talking to the various people that educators are directed to discuss their retirement options. It is important to understand that not all financial professionals are equal, and whose interest are they really looking out for when giving advice.

Sometimes the email includes a simple phrase like, “He/She said I should take a lump sum distribution on my pension,” or “I was told that I should take the highest monthly pension payment and buy insurance.” My reaction to these statements is always “why?”

Understanding the thought process behind what someone is suggesting is important. Is it because of some information I have yet to be told? Is it due to some underlying worry by the client and/or professional? Is it because the professional is simply trying to pigeonhole the client? Is the professional trying to figure out a way to sell the client something?

Fiduciary vs. Suitability

Over the last few years there has been more and more emphasis on what is called a “fiduciary” or the “fiduciary standard.” A fiduciary is obligated to look out for only the best interest of the person being served.

Most brokers, insurance agents, and some financial professionals only follow what is called a “suitability standard.” That simply means that the investment they are discussing must be suitable, but it may not actually be in the best interest of the client - it could be in the financial professional’s interest due to fees/commissions.

The financial industry has fought between the fiduciary standard and the suitability standard for many, many years as brokers have not wanted to be forced to be fiduciaries. Under the Obama administration, the fiduciary standard was set to become law, but President Trump has slowed the process and rolled back some of the provisions.

Additionally, some designations may make their members adhere to a fiduciary standard. For example, a CERTIFIED FINANCIAL PLANNER™ (or CFP^®) must adhere to a fiduciary standard as a basic part of the Code of Ethics and Standards of Conduct. They placed a full page ad in The Wall Street Journal on 12/22/17 stating as much - The Wall Street Journal Ad.

Check out what Investopedia said on the subject - Choosing A Financial Advisor: Suitability Vs. Fiduciary Standards.

So Are You Getting the Right Advice?

Without trying to sound all knowing - Maybe.

Looking at the examples in the second paragraph, there could be some valid reasons for taking a lump sum distribution or taking the single life payout and buying insurance, but these are determined by the facts of each individual case.

Lump Sum Distribution - For example, someone of retirement age that is not married and is diagnosed with a terminal disease may look at a lump sum as a way to get the maximum from the plan for their beneficiaries rather than a pension. I would still say to rollover the lump sum to an IRA (for tax reasons), but this could potentially be the best for the client or at least an option to discuss.

Highest Pension Benefit and Buy Life Insurance - This example is usually a bit more complex in that the beneficiary(ies) are a big concern. If a retiree is married with a spouse that is not in great health, this is sometimes the option that a retiree may be given. Thinking it would give the healthy retiree a high benefit with life insurance benefits for the spouse in questionable health if the retiree passed. This is still somewhat of a problem option in that many pensions give a “pop-up” choice that gives one benefit then adjusts to a higher benefit if the retiree is the surviving spouse - BUT not all pensions have this option, so again each case needs to be thoroughly researched and reviewed.

Ask Questions

What I am attempting to say is that when you are talking to a financial professional, ask questions. You would ask a doctor questions giving you medical advice, and this should be no different.

Are they a fiduciary?
What are their fees?
How are they paid and by whom?
Is there a conflict of interest?

These are obviously just basic questions to ask, but they are a good place to start to get information and become knowledgeable about your financial situation.

If you do not know the answers to these questions about your financial professional, I would suggest starting 2018 with finding out this information.

Winding Down 2017 and Gearing Up for 2018

2017-12-27T12:51:00.001-05:00

As we wind down an eventful and interesting 2017, I wanted to say that 2018 will be a bit more active on The Educator's Retirement site.

First, I have continued to receive emails from various educators and others over the last few years asking numerous questions. I know most of the items on the site are a bit older, but most are still very relevant - but I will be reopening the discussions and updating the information as needed.

Also, the new tax reform bill will dramatically change numerous items for most Americans, so as the law becomes more concrete, I will try to discuss it more. What I can tell you is that approximately 35-40% of Americans itemized in years past, and with the new tax reform bill, this number will drop to approximately 5-8% based on one estimate. This could dramatically change a number of items, so I will try to comment as we move forward.

Additionally, while I will try to continue to focus on educators, I have been receiving more and more emails asking about the spouses of educators and what they should be doing. I will dig into that subject because today "we" cannot just base everything on one spouse and hope it all works out. If both spouses are working, they both need to be contributing to retirement accounts/pensions to make sure that the family potentially has the best retirement possible.

Finally, many people have asked me to include a photo or two and/or chat more about my life. I will try to do that as well. I think the photo below will tell you what I have been up to for the past few years, and how busy life outside the office truly is!

Robby, Caroline (3.5), Danielle, and Reid (2)

As always, I look forward to hearing from you and trying to help guide you toward your retirement.

I wish all of you continued success and a happy and healthy 2018!

Robby

An Update on What I Have Been Doing

2016-02-11T12:20:00.000-05:00

First, thank you for all of the emails. I always enjoy hearing from my readers whether it is a question, some news or an update, or simply to say hello. When you write a blog and post it, sometimes you have no idea if people actually read it, or if you are just posting something that no one ever sees – so thank you.

I was surprised by the number of emails that I received that simply wanted to know how I was doing. Really surprised.

I am doing very, very well and feel fortunate to have a great professional and personal life. I believe the last “personal” update from me was part of a post I wrote in August 2014 (Are You Ready for Life’s Changes?). I will not rehash everything told in that post, so since then, Danielle and I were blessed to have another child – Patrick Reid (September 28, 2015). I can hear the chuckles already… a 24 month old and a 4 month old… Sleep is a very rare commodity.

Below are some pictures from Caroline’s birthday two weeks ago, so please enjoy.

The Birthday Girl - Caroline

Reid and Dad

Happy Parents - Danielle and Robby

I hope all of you are doing just as well, so please let me know - rschultz@rollinsfinancial.com.

All the best,
Robby

Are Teachers Being Targeted by Financial Firms?

2015-11-09T15:54:00.000-05:00

I am constantly reading numerous publications to stay abreast of the happenings in the financial world. In the last two days, I have received two articles talking about "teachers" and how they handle their financial lives. Interesting...

One was written by an author that discussed how teachers have "a complex financial picture that includes pensions, 403(b)s, flexible-spending accounts and more. Financial advisors who specialize in supporting educators emphasize that teachers need guidance and sometimes even protection from bad choices, to ensure they get the most from their salaries and benefits." The article went on to quote 3 advisors with differing backgrounds and gave various quotes from each about educators as clients.

The second was written by one of the three advisors in the first article pushing a product to advisors to essentially reach more educators. I was a bit astounded to read that the product being pushed to advisors would charge monthly fees of up to $1,000 per month. By the way, the advisor is an advisor of educators and promotes the firm as such.

I guess I was just early to the game...

Over seven years ago (mid-2008), I started this blog as a way to answer questions that numerous educator friends of mine were asking me. If you will remember, things were all over the place in 2008, and financial markets, accounts, pensions, etc. were all being questioned and wondering if we would all make it. I wrote a ton back then because there was a bunch of misinformation and numerous subjects I had never even touched on - 403(b)s, various pensions, PLOPs, Social Security, WEP, GPO, etc., etc. I have tried to tackle each one, and when something has changed, I have tried to update everyone. Looking back, living/working in Georgia I have more knowledge of the Georgia pensions, but I have researched and answered hundreds of emails from just about every single state. Honestly, I have learned a great deal too, and I really do enjoy some of the challenges y'all have thrown at me over the years. This blog and posts have now been viewed more than 100,000 times, and that is pretty impressive for something that started as a simple way to update friends.

Which brings me to today...

I wish that I could say that there are not groups preying on educators and suggesting products and investments that benefit the advisor more than the educator, but there are. The vast majority of 403(b) accounts still sit at institutions that eventually try to push the educators into annuity products locking up their money and/or costing them ridiculous fees. After they sign up though, how often do the advisors even reach back out to those clients?

I wish more educators - both starting and experienced - contributed to their own retirement accounts. Whatever pensions the educators may have are great, but the flexibility of having additional funds to tap into when needed can make all the difference in the world.

I have seen school systems start to make real efforts to try and educate their educators, but unfortunately, it needs to be more prevalent and even more far reaching. From the first year educator to the soon-to-retire educator/administrator, if educators knew more and pushed more, the community as a whole would greatly benefit.

My question to all of you is what changes have y'all seen? Are more people saving? Do your friends understand the positives and negatives of their investments?

I setup this blog to help, so "help me help..." I want educators to make informed financial decisions, and if needed, get advice from those that have your best interest at heart. I do not want to educators be misguided into products and services that are unnecessary or riddled with fees to help the advisor/firm. Please email me (rschultz@rollinsfinancial.com) to suggest subjects, answer questions, or even just say hello.

To me, educators are a critical part of our society that have chosen to serve our communities and educate our children. When they spend so much time trying to help our children, shouldn't they know that they are also being helped?

Some Unexpected Very Good News...

2015-06-17T13:08:00.000-04:00

I generally do not put too much information on this blog about my firm, Rollins Financial, Inc., but I have received several emails regarding the news, and some things are simply too good not to pass along.

On June 3rd, Rollins Financial was ranked #20 by CNBC on its list of "Top 100 Fee-Only Wealth Management Firms in the U.S. for 2015."

Firms were ranked by the CNBC Digital editorial team, along with Meridian-IQ, using a formula which evaluates assets under management; having staff with professional designations; working with CPAs, attorneys or other third-party professionals; average account size; growth of assets; years in business; number of advisory clients; and providing advice on insurance solutions. Rollins Financial, Inc. achieved the highest rating of any firm based in the state of Georgia.

Thank you for allowing me a few moments to boast. If you have any questions or if there is anything I can do for you, please email me at rschultz@rollinsfinancial.com.

About Rollins Financial, Inc.
Rollins Financial, Inc. is an Atlanta-based registered investment advisory (RIA) firm with more than 25 years of unparalleled service. Rollins offers fee-only independent investment management services for individuals, small businesses and corporations nationwide. The firm holds a strong commitment to objectivity, transparency and disciplined investing, and offers a wide variety of services including asset management, financial planning, and coordinated tax planning and preparation (through its affiliated certified public accounting firm, Rollins & Van Lear, P.C.). More information about Rollins Financial, its partners, and the services the firm provides can be found at www.rollinsfinancial.com.

Do You Know What to Expect in Retirement? Part 3 - Common Misconceptions

2014-09-21T00:16:00.003-04:00

Over the past three weeks I have received numerous emails with various questions about retirement and social security. Most of the social security related questions revolve around the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO), but a few have "struck" a different tone - and that is what I wish to cover today.

One of the most intriguing comments to me was the notion that paying into Social Security and an educator pension was somehow double paying into retirement. I guess I can somewhat see that point of view, but I want to back up and explain how the corporate world works versus the government/educational world in terms of retirement.

Corporate Retirement - Most corporations did away with pensions 20+ years ago since a "defined benefit plan" (i.e. pension) could potentially be much more expensive than a "defined contribution plan" (i.e. 401K or similar plan). Businesses set up 401(k) plans to entice employees to contribute to their retirement with "matching" contributions and possibly "discretionary" profit sharing contributions. Depending on the plan, the company's matching and contributions "vest" over a set timeframe between immediate and 6 years. The benefit of this type of plan for employees was that they could "see" their retirement accounts, and if they left the company, they could roll the vested balance to an IRA. The bad part is that the employee is responsible for their own retirement.

Essentially, the company has made their contribution to the employee and left it up to them to figure it out. There may be some educational aspect of what they are doing, but the burden of responsibility has shifted. The company is only a contributor and not responsible. Also, if the employee has not contributed enough, it is on the employee...

As a rule of thumb, an employee should be contributing around 15% of their gross income to a retirement plan, so if an employee is putting 10% in the 401(k) and has a 4% match, then they are at 14%... pretty close to what we hope our clients are doing. Then you add on Social Security. The employee still has to contribute to an additional 6.2% (up to the current income limit) to Social Security (the employer does too).

We can all do that math for the employee - 10% to the 401(k), 6.2% to Social Security... 16.2% total, AND the employee is still on the hook for making sure the 401(k) is enough to fund their retirement.

Government/Educational Retirement - Most of the people reading this post will know about their own pensions contributions, so I will try to make this section brief.

In Georgia, educators have the Teachers Retirement System of Georgia (TRS). Currently, employees contribute 6.0% of their salary with employers contributing and additional 13.15%. These contributions are the foundation of your future TRS pension. Think about though - 19.15% of your salary is being contributed to a fund that ultimately helps to pay for your pension.

If the school system does participate in Social Security, then the employee contributes 6.2% (and so does the school system). In total, the employee will have contributed 12.2% of their salary.

If the school system does not participate in Social Security, then the educator does not contribute anything else. The TRS contribution of 6.0% is the total contribution by the educator. While I understand that this amount is not zero, it is also worth noting that corporate employees contribute 10.2% more of their salaries and educators in Social Security contribute 6.2% more.

For the educators that do not contribute to Social Security, the discrepancy between those that do contribute and potentially the lack of any retirement funds outside of TRS are the reasons why I have preached over and over about starting a 403(b) and making contributions. Even contributing only an additional 4% (10% total) to a 403(b) will make your potential retirement income substantially more. Additionally, if/when you are effected by the WEP, these additional funds will help to offset the reduction of Social Security.

In conclusion, corporate and educational/government retirements are quite different in how and by whom they are funded, but in both cases, it is the employee's responsibility to know and understand what their potential retirement looks like. If they do not work to make sure that their retirement is secure early in their careers, employees may end up scrambling at the end to make up for any shortfalls.

Do You Know What to Expect in Retirement? Part 2 - Naming a Beneficiary

2014-09-06T11:28:00.002-04:00

After last week's two posts, I received numerous emails, and the most troubling questions to me dealt with a lack of knowledge regarding beneficiaries. This post will hopefully be a good basic resource to use for individuals trying to understand why and how to name beneficiaries. This list is not exhaustive though, so please make sure you talk with your financial advisor or attorney if you have one. They should be able to answer any additional questions.

Can't I just make my retirement account a joint account?

A retirement account is only titled to a single individual. It does not matter if it is pension, IRA, Roth IRA, SEP-IRA, 403(b), 401(k), etc. They are only "owned" by a single person. They cannot be made into joint accounts with your spouse, children, etc. One owner only.

Do I really need to name someone as a beneficiary?

YES!!! There are numerous advantages including being easier to access, not having to deal with the probate court, and tax advantages/options for your beneficiaries.

If you are married, a pension or 401(k) account must have your spouse as the primary beneficiary (unless they allow themselves not to be named), but you should always name contingent beneficiaries too. If something happens to both of you, this will direct who should receive the funds.

My brother, Brad, opened a small Roth IRA as an additional savings account with his bank a few years ago, and while completing the application, Brad forgot to name someone as his beneficiary. Not good.

Brad obviously rarely thought of the account, and when Brad and I discussed his financial accounts, he did not even mention the account. It only had a balance of only $500, and I managed essentially all of his money anyway.

Brad passed away in February 2013, and a few months later Wells Fargo alerted my parents to the account. Since Brad was not married and did not have kids, numerous court documents and forms would need to be completed. One of the documents was a small estate claim form that costs $300 to file along with an appearance in probate court. An additional letter signed by an attorney verifying that Brad did not have children. The costs of these items was close to $400 plus personal time... all to get $500.

Honestly, I do not think my family would have cared if Brad had named a charity, relative, friend, or even some random person... any of that would have been better than the cost and hours of time that has been spent (and still being spent) to collect $500.

Yes... name a primary beneficiary(ies) and contingent beneficiary(ies). It will help those you leave behind.

Doesn't my will cover my retirement accounts?

Actually, not necessarily. If your will says your retirement account(s) should go to Joe Smith, but the beneficiary form(s) with the financial institutions say that they should go to Bob Black - the money goes to Bob Black. Joe Smith can try to fight it in court, but I have never seen a single case in which the will overruled the beneficiary form.

If you name "The Estate of 'your name'" as the beneficiary, your will would be used, but this involves going through probate court, and generally takes much, much longer and is far more difficult than simply naming those you wish to name.

Also, changing your will is generally expensive. Changing your beneficiary on a retirement account is usually one form, one signature, and free. You tell me which is the better option?

What if my child(ren) is young?

This is a common question since people are worried that the child(ren) is too young now to handle any funds. Two things - 1) you may not die for many years; 2) the custodian of the child(ren) generally is the one that becomes responsible for the funds. The funds though are the child's under the guidance of the custodian.

One thing to note though is that a custodian of a child's account has a "fiduciary" responsibility to do what is in the best interest of the child. If the custodian mismanages the funds, the child can actually sue the custodian - and it has happened.

Name your children as beneficiaries (normally after your spouse) and in your will, make sure to name a responsible person to serve as custodian for your children and the funds.

How often should I update the beneficiaries?

This is a very good question. We usually try to remind our clients to update their beneficiaries when big life events happen - marriage, children being born, a death of a beneficiary, divorce, etc. There can be other times, but these are the basics.

Conclusion

Remember that the reason you are naming a beneficiary is to make sure that your hard earned retirement funds are going to the person/people that you want. Do not forget to do this one little thing that will save your survivors time, money, and frustration.

Are You Ready for Life's Changes?

2014-08-28T09:00:00.000-04:00

“The measure of intelligence is the ability to change.” – Albert Einstein

A few years ago I went to a conference that was aptly titled, "Change is the only constant." We all change. Our bodies, minds, opinions, families, friends, goals, financial situations, investments, etc., etc. In the previous list, every single one of them is important. So when your life changes, what do you do?

As an analytical person that is a financial advisor, I constantly view the financial aspects of change. Changes to employment, health, investment strategies, contribution or withdrawal habits, family situations, tax ramifications, etc. I know, I know... incredibly interesting stuff. Some of these things you can plan for and some you simply must react to, but is there something you can do to help yourself? The answer is yes, but it is not that simple. What I can say is that it is generally better to have made at least some preparations than none at all.

About two years ago my brother, Bradley August, was diagnosed with stage 4 esophageal cancer on his 34th birthday (August 20, 2012). Less than two weeks later (September 2, 2012), I was lucky enough to marry my beautiful wife, Danielle, with our families attending and privileged to have Brad as a groomsman. Danielle threw an incredible surprise 40th birthday party for me with family and friends in attendance (December 10, 2012). Then, six months and one day after his diagnosis, Brad passed away (February 21, 2013). Finally, Danielle and I were blessed to have our daughter, Caroline August (February 1, 2014). All of these events happened in less than 18 months and had obvious meanings on many levels, but how was I prepared for them?

First, Brad's diagnosis and subsequent passing came as a shock to all of us. A problem Brad had swallowing quickly was found to be a malignant tumor in his esophagus during an endoscopy. The next few months were tough times for our family. As an older brother, you never really get over being the protector for your younger siblings. There were numerous weekend trips to Dallas to help and spend time with Brad. Since this is a financial blog, yes, I focused on financial matters - learning about and applying for Social Security Disability Insurance (SSDI) for Brad, and at the very end, I helped with the movement of some of Brad's assets to make things easier after he passed. While they could be construed as minor items at the time, the time and money saved later was well worth the effort.

Next, being "more established" (i.e. older), my financial situation was quite a bit different in planning a wedding. That does not mean that there was not a budget, but we did not rely on our parents or drown in debt to have an incredible wedding and honeymoon. I was fortunate enough to have been able to save and afford a very nice wedding set for Danielle, and together, we paid for the vast majority of our wedding weekend sometimes against the wishes of our parents, and all of our honeymoon. On the financial side, Danielle and I are both pretty inline with each other. She is very much a saver that likes very nice things much like me. We took apart every piece of our wedding weekend and honeymoon to get the most enjoyment possible for our family, friends, and us while knowing that we were being fiscally responsible. I will not dive into the details, but planning ahead, being flexible, negotiating, and really knowing your own wants and desires really can pay off. An important note though - Do not forget the truly important things in life. The best gift to both of us though was being able to have that one great weekend that was full of pictures of family, friends, and Brad. Those photos never get old.

** - As a side note, getting married dramatically changes your financial landscape all in one fell swoop. Wills, Power of Attorneys, accounts, beneficiaries, etc. all need to be updated to reflect the changes that have just happened. For instance, your 401(k), 403(b), pension, etc. will automatically change to have your new spouse as the beneficiary whether you want them to be or not. In fact, if you do not want your new spouse to be the sole primary beneficiary, they must sign off on it. IRAs do not have this same change happen.

I had a great childhood, but I honestly could not begin to tell you the last birthday party I had. Unbeknownst to me though, Danielle orchestrated a surprise 40th birthday for me that included my dad, her entire family, our office, and numerous friends from far and wide. While nothing truly financial happened, my 40th birthday was an occasion that made me really start to work on our long term future. Yes, even financial advisors sometimes need to take a step back, assess, and plan for our futures.

Finally, becoming a parent earlier this year was something that I had always hoped for but wondered if it would ever happen. Thankfully, it did, and our daughter is beautiful (like her mom) and healthy. Now, since I had numerous nights without sleep for the first few months, I had plenty of time to plan our daughter's future... Ok, maybe I was so tired that when I could finally get up the strength, I made the first contribution to her 529 account, but it is a start. Wills, beneficiaries, life insurance policies, etc. suddenly need to be reviewed and altered again, and this is only the beginning.

What changes have happened in your life? How did you react, what did you learn, and are you ready for next time? There is never a good time to deal with everything that needs to be done, but do not forget, it needs to be done.

“We cannot change the cards we are dealt, just how we play the hand.” – Randy Pausch

Do You Know What to Expect in Retirement? Part 1 - Retirement Income

2014-08-24T13:16:00.000-04:00

Today's post is the first in a series discussing the various parts of retirement. My hope is to discuss the many issues facing today's retirees to make sure that those individuals that are close to retirement are prepared.

For today's topic, let's start with the most basic issue - retirement income.

First, let me say that everyone and his/her situation is different. While the majority of the people reading this will be an educator (or spouse of an educator), your age, degree, number of years of service, marital status, position, school system, state, retirement account(s) - or lack of retirement accounts - and a plethora of other variables will determine what your income during your retirement will be.

Educators generally have very good pensions to rely on, but unfortunately, educators sometimes put too much faith in the school systems to educate them on what to expect. On something this important, that is a big problem.

In Georgia, the Teachers Retirement System of Georgia (TRS) does a fairly good job of trying to keep its members informed, but even the annual statements and projections for retirement can be confusing. I have had numerous educators ask about rolling over "their part" of the annual TRS statement since they thought that this was separate from their pension or not really understanding that once "their part" is gone, their beneficiaries will receive nothing. On the retirement projections, I had one educator recently question me about the benefit I said she was going to receive versus the benefit she calculated online. Essentially, she thought she was going to be receiving more pension than her current salary. She was looking at the "projected salary" to base her pension from and thought that was her "projected benefit." She went from thinking she was set and happy to starting to worry about her retirement income. Luckily, she was still 8 years away, but imagine if she had not talked to someone...

To further complicate the TRS issue, numerous people do not understand the lifelong impact and tax ramifications of taking a lump sum payment. They are generally thinking of paying off debts and simplifying their life. TRS certainly tries to disclose and explain the issue, but sometimes, it really takes a one-on-one discussion to gets to the nuts and bolts the issue at hand.

Also, choosing a payout option is sometimes a tough decision to make. If you take the max option and something happens to you, your spouse may be left with nothing but the plans that together y'all had made... Not a great feeling trying to explain to someone that just lost their spouse that the deceased spouse's pension benefit is also going away. Income from both spouses, life insurance, Social Security, etc. should all be factored into deciding the best pension distribution option.

After TRS, each school system potentially does something different. Some counties - like Cobb and Henry - are part of Social Security, so their retirees will have that benefit. Other counties do their own thing - like Gwinnett County with GRS and Rockdale County that has mandatory 403(b) accounts with matching. Finally, other counties "recommend" contributing to 403(b) accounts, but they never really explain the current benefit of not contributing to Social Security and the future impact of this decision - Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). I am guessing that you are starting to understand my point.

Now, let's talk about having or not having a retirement account - usually a 403(b) and/or IRA. These accounts will be over and above the pension benefit and can be used as needed by the retirees. Yes, their income is taxable at ordinary income rates (unless it is a Roth), but the accounts are flexible and can fill in gaps when/if necessary. I have preached and preached about the benefit of having a 403(b) especially to those that are not paying into Social Security, but I know that the vast majority of educators do not. It is really hard to imagine how even a small amount over 30 years can be something substantial, but it really, really can.

I have seen numerous educators finish their 30 years in the public system only to then go to the private schools for numerous years to help bridge the gaps in their retirement planning. This is a viable option if you figure out the issue early, but seeing the problem years later may make getting a job in private schools tough. Many educators after retiring for a few years honestly cannot begin to get back into the swing of things and simply try to make do... This is something I do not want to see.

Far too many educators and their spouses still do not understand what their income will be in retirement, and they may be at or very near retirement. They have focused on "30 years" for so long that when they get there, they just imagine that it will all work out for the best. Unfortunately, whatever plans that they are envisioning may or may not come true because their retirement income was never fully understood.

So, have you fully analyzed your family's potential retirement income? If not, I beg you to do so especially if you are in 10 years or less from retirement. This is the last window to make changes to set yourself up for your dream retirement.

Do you need a full Retirement Income Analysis? If the answer is yes, then I would like to help. First, let me say that the analysis and any meeting/discussion are absolutely free with ZERO costs or future obligations.

Through my firm, we have come up with a pretty robust yet understandable retirement income analysis tool that can help to predict your family's retirement income. We look at the individual (or both spouses') pensions, Social Security, outside investments, and any other potential income streams to predict where we see your income at retirement and beyond. The cost to you is zero with the ultimate goal being to help.

The offer is out there... now, will you make sure you know/understand what your family's potential retirement income is? If you want to get started, simply send me an email - rschultz@rollinsfinancial.com.

Whether I help you or not, the goal here is for you to be ready at retirement. Do not think that this is something that you can simply handle later... There are very, very few things more important than knowing your retirement income for the rest of your life.

Coming to Terms with the Windfall Elimination Provision and Government Pension Offset

2013-08-09T15:21:00.000-04:00

Each week I receive emails from readers of The Educator's Retirement discussing wide ranging topics from different state pensions to 403(b)/457 questions, yet the one subject that I receive the most emails about is the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). I read about stories where soon-to-be or current retirees suddenly find themselves without a benefit (Social Security) that they thought they would receive. I answer every single email and sometimes have more dialogue with the writers. Sometimes, I just read/listen and confirm what they have been told, and other times, I try to point them in a direction that they might be able to receive some help. I know that far too often my responses are not what the writers want to hear...

Today, I want to tell everyone a story... It is not a story where someone beats the WEP/GPO, but to me, it is a positive story that I wish more people would start to understand about the WEP/GPO.

I am lucky in my job as an investment adviser that I get to see numerous clients that span the complete spectrum of wealth. I treat each one the same since whatever problems/issues they are facing are real to them. To one person it could be an estate tax issue, to someone else it might be trying to convince them to contribute to their retirement plan or pay down debt, and to another it might be discussing their investments. All of their issues are real.

When I started at my firm 15+ years ago, I had never heard of WEP or GPO. As far as I knew, those issues were remote and had no bearing on me. When I started to learn about the issue a few years later from a group of educators that included a family member and their friends, I took a long, hard look at the issue. I read everything I could find on the web, and yet, both the WEP and GPO seemed to get little attention. I discussed the issue with a few clients at the time and explained what I had found...

A very short time later, a different family member (who was also an educator) needed some help making some career decisions that could possibly have retirement income repercussions. I read more and made some phone calls to Social Security, Georgia's Teacher Retirement System (TRS), and even both local school systems being discussed. The issue was important, it was relevant, and the advice I could be giving was going to have very real long term positives or negatives for this family member. Imagine dealing with THAT every family get together!!??!!

Since I became an "expert" on the WEP/GPO, whenever one of my firm's clients had questions about either the WEP or GPO, I was routinely called in to discuss the ramifications with them. Unfortunately, sometimes even the client did not have any idea that they could/would be affected by this rule. To make it more confusing, around Atlanta some school systems do contribute to Social Security and some do not. Some that do not have mandatory replacement retirement plans (instead of Social Security) and others simply "promote" participation in 403(b) plans. A group of 10 educators from various school systems around Atlanta may be in completely different retirement income situations and not even know it.

So... now to the story...

"Mary" and her family have been clients of my firm since the early 90's - well before my time here. When I started to learn about the WEP/GPO and discussed Mary's situation with her many, many years ago, she was pretty much surprised and astounded that she did not know anything about it. She talked to friends, did some research on her own, and even discussed it with TRS, and she started to understand what was going to happen to her Social Security benefits.

Mary's husband, "John," had a very good job and had been paying in to Social Security since college. Mary and John had always believed that Mary would receive her "spousal benefits" based on John's Social Security earnings/benefits. Even if something happened to John, they still believed that Mary would reap the rewards of John's Social Security benefits. I mean it works for everyone else, right?

Every year, John and Mary would come to our office to discuss their taxes, investments, retirement income, etc. And, every year, we would get around to discussing potential Social Security benefits for both of them. We always had projections for John's benefits, but we always omitted Mary's completely. I always told her that if she received anything, just consider it found money.

After being an educator in Georgia's public schools for 30 years, Mary retired from her public school position. Later that summer, she was offered a position at a private school, and while the salary and benefits were less, she loved it - AND was paying to Social Security. Additionally, Mary was lucky enough to have had 30 years in the Georgia TRS system, so she was eligible for her educators' pension.

John and Mary have continued to come in to our office for their annual "check up" and discuss their situation. It has now been seven years since Mary "retired" as a public school educator and took a position at the private school. Since our first conversation regarding the WEP/GPO, John and Mary made some changes. Mary started a 403(b) account (even though it was late in her career), she took the private school position (when some would have retired completely), and she learned to never expect a penny from Social Security. This is not to say that Mary squirrels away every penny she makes, but she is watchful of their money and thinks about the long term. John and Mary enjoy their life, family, and have fun, but they learned to set limits and stay within those limits.

Last week, Mary sent me her Social Security statement with a note that the next day she was having a conference call with Social Security because she turns 66 later this year (Mary's Full Retirement Age with Social Security). I went through Mary's potential benefits page and then researched her earnings page. While Mary had 39 years in which she contributed to Social Security, I calculated that she only had 19 years of "substantial earnings" thus she was going to be subject to the maximum WEP. I did the quick calculation to get my projected benefit for her, then gave Mary a call.

We discussed what I had calculated and how I had come to my figure. She was pretty sure I was going to be right, but the Social Security conference call would verify everything for her the next day. I did ask her to do me one favor though during her conference call. Even though I knew the answer, I wanted her to ask Social Security what, if any, "spousal benefit" she could receive...

The next afternoon, Mary called me to discuss the outcome of the conference call. Just as we discussed and I calculated, her benefit was reduced by the maximum WEP. Also, she did ask Social Security about her "spousal benefit," and it had been reduced to zero as we had suspected - but had hoped otherwise. In the end, Mary's benefits had been greatly effected by the WEP, and Mary's "spousal benefits" were reduced to zero by the GPO... so where is the positive here?

As we finished up discussing the conference call with Social Security, Mary surprised me by thanking me. Mary told me that while she had hoped her benefits would not be effected and that I was simply wrong, she knew what the end result would be. Since we had been talking about this 10+ years, Mary had been able to change. Change her thinking on her Social Security benefits, change her spending habits, change her savings habits and goals, and even change her "ultimate" retirement date. Was she happy about the reduced benefits? Of course not, but Mary has been able to help herself and her family by altering those ideas that she had 10+ years ago.

We can all get mad at the system and listen to the empty campaign promises of those in Washington, but ultimately, with the problems facing the national debt, social security, and healthcare systems, is the WEP/GPO really going to go away? I wish the answer was yes, but I see the answer continuing to be no. I am not saying that anyone should stop being against it, but I am also saying that the realistic view is that it does not seem to be going away anytime soon.

My hope for all of those that are affected by the WEP/GPO is that they learn about the issue early enough to be able to help themselves like Mary did. I know it will not be easy. But, if we are able to be proactive and educate those that will be subject to the WEP/GPO, hopefully, some of them will be able to take the bull by the horns themselves.

Good luck!

How Do You Make Your (Financial) Decisions?

2013-05-15T16:08:00.001-04:00

This week I have been attending an AICPA Employee Benefit Plan conference in Dallas, Texas. This is my first conference of this type, so I was a bit apprehensive as to what I would "get" from the conference. That apprehension did not last long.

The very first session was a general session with a recorded video from the Assistant Secretary of Labor (note - due to a meeting, she was unable to attend). Of course, there were numerous parts of the video that did not really interest me, but then the speaker stated...

"How do you make your (financial) decisions?"
Suddenly, I was listening to the speaker talk my kind of language...

She was talking about how the Department of Labor (DOL) was interested in how employees made their financial decisions. One of the quick things the speaker stated was that the DOL had come to the decision that bad, conflicted advice was worse than no advice... Um, not good.

The DOL was looking for things like:

How do you make retirement decisions?
- Do you read, talk to someone, "just know," or ???
If you do talk to someone,
- How do you choose?
- How do you know this person has your best interest in mind?

So, if the DOL is interested in this information, I should be too. Please tell me your answers by emailing me rschultz@rollinsfinancial.com.

The speaker then mentioned how a SEC registered investment advisor representative has a fiduciary standard whereas a broker usually has only a suitability standard.

In case I have lost you, the standards above are not the same thing.

The "Fiduciary Standard" is the highest standard of care. A fiduciary must work in the best interest of the client only and not in the interest of the fiduciary. In fact, by being an SEC registered investment advisor representative, the representative has stated that they will follow the fiduciary standard.

The "Suitability Standard" is different in that the investment that is being offered only has to be considered "suitable" not necessarily in the client's best interest. Broker-Dealers and their representatives are usually held to this standard.

What does this mean to you? Well, it depends. I have reviewed hundreds of portfolios over the years. Some have been suitable but benefit the representative more than the client due to commissions and fees that might be hidden from the client (think annuities as an example). Some have clear fees and are setup to help the client, but maybe the funds are just lackluster and the representative does not trade much or ever. Some have been spot on with clearly defined fees, well regarded funds, and a good track record...

What I am trying to tell you is that not all your "advisors" are created equal or even follow the same guidelines. Do you know how your advisor gets paid? I promise - your advisor is being paid.

In another class at the conference, the speaker stated, "Most employees think that their plans are 'free' or 'very low cost' since they are not 'charged' fees." As I have discussed before, there are numerous investment products that charge very high fees, but some could be hidden in the "fund expenses" of the plan. Do you know what you are really paying for your accounts?

All of these questions are important, and if you do not know the answer, do not be afraid to ask. The markets have been great since March 2009, but that does not mean that you cannot question your advisor.

I would enjoy hearing from you about your answers to all of these questions, and if you wish to ask me questions, feel free. My email is rschultz@rollinsfinancial.com.

Hello... Again...

2012-05-29T11:12:00.000-04:00

Hello all...

First, I know that I do not post here too often anymore, but there is not a week that goes by that I do not receive an email thanking me for the website or asking for some advice/help. I am happy that my little web project has become a source for many educators to use, and when things change, I promise to post something about the changes.

As for the emails I receive, I certainly try to answer every single one of them, so if you sent me something and did not get a response, I probably did not receive it, so please try again. Everyone has different concerns and questions, so if I didn't hit on yours in a previous post, then email me a question.

In the meantime, today's little blog is simply something to say hello. I hope that all of you are doing well, so if you feel like sending me questions, comments, or just a hello, just email me at rschultz@rollinsfinancial.com.

All the best,
Robby

A Suggestion for Employers of (Georgia's) Educators

2011-09-24T09:00:00.000-04:00

I have been thinking about this post for months (since December actually), and after talking to various educators, administrators, and colleagues over a number of months and years, there are a great many things that always seem to come up.

Most educators don't think about or discuss their retirements with anyone until the last few years before retirement.

While most educators seem to have at least a basic understanding of their pension benefits,

they have little or no comprehension of their Social Security benefits (or lack there of)
they do not realize the opportunity they are missing by not contributing to a retirement plan/account

Employers hold employee orientations that cover retirement benefits, but (based on my conversations with educators) there is so much information giving in the 1-2 day orientation that most educators ignore the retirement section (usually part of the new employee orientation).

There are many things that I could say here to employers (school systems), but the bottom line is simple - Educate the Educators. That's it.

Essentially, employers should set aside time to educate their employees on the various retirement benefits that they have and that they could receive as well as those they will not. If the employer withholds Social Security or does not, they should explain what it means to the employees. They should make sure to stress the need for 403(b) accounts, discussions on TRS benefits, and more - throughout their employment and not just before the last few years of service.

I had one administrator tell me that if they told their employees about (not paying in to) Social Security it would scare them. Well, maybe it should.

In the private sector, employers and other employees stress the need to contribute to retirement accounts - 401(k), IRAs, etc. In the public sector, I have failed to see a similar push. I believe that most people see their pensions as enough, and when you toss in Social Security, they are quite sure they are set... BUT, what if they receive little or no Social Security - ever? Does the employer have a responsibility to explain this to the employee?

Granted, I have not compiled a list (or know of one) of which counties have opted out of Social Security in Georgia, but in those counties especially, the need to educate your educators is immense. They could be completely and literally blindsided by the effects of not contributing to Social Security (yes, I mean the WEP and GPO).

In some counties, employees are forced to contribute to mandatory 403(b) accounts usually with employers contributing as well. I have heard many educators complain about this and think that it is "unfair" for the county to force them to contribute. When I have discussed and explained the issue with them, the vast majority usually change their tune. It's not that they are against it, but that they do not understand why it is being done. That to me is the problem... educators may not understand it, and if employers only discuss it with them on a few occasions, educators could miss an opportunity to help themselves.

One final note is that employers do not need to get the same people selling the 403(b) accounts to the educators to give the information about the benefits of investing in the 403(b) accounts. They need to find an unbiased voice that will explain the issues of the WEP and GPO to the educators, and from there, show that investing in 403(b) accounts is the best way to safeguard their retirements. Just my humble opinion.

Japan Earthquake and Market Volatility

2011-03-19T09:00:00.002-04:00

One of my colleagues, Eddie Wilcox, wrote a post for our blog, The Rollins Financial Blog, yesterday, and I thought he did a very good job of discussing the current issues involving Japan. It is always important to remember that the long term effects can be vastly different than the short term.

Japan Earthquake and Market Volatility

The world equity markets have been rattled lately by the devastating earthquake in northeastern Japan. It’s not the earthquake itself that caused such an enormous disturbance. Rather, it was the tsunami that followed and its ensuing damage to the nuclear power facilities of the affected area. Headlines of possible meltdowns at those nuclear facilities have clearly spooked investors and some of the Japanese over the past week.

While the human impact on those in the region is permanently devastating for the families involved, the economic impact is probably less permanent. We have been closely monitoring the affected investments, especially those located in Asia and Japan. The uncertainty of the event is, in our view, causing the most impact on the markets. While the nuclear situation still does not appear to be completely under control, it does appear that the Japanese and the international community are devoting every possible resource to gaining control of the problem.

Natural disasters have been and will always be one of the risks to the economy. In almost every example, however, those risks are concentrated in the near term following the event. The economic disruption is definitely felt in the immediate aftermath, but in the long term, the rebuilding process can make up for – or even eclipse – much of the initial loss of economic activity. This seems likely this time also, as Japan has unleashed nearly unlimited resources to battle the situation.

Clearly, the near term impact will be felt by many Japanese and U.S. companies with a presence in Asia and Japan. Depending on how you look at the numbers, you could argue that the event may or may not have much of an impact on the world economy. Japan remains the third largest world economy at about $5 trillion in GDP and accounts for over 8% of the world economic activity, which is very significant. However, the affected area accounts for a rather small portion of Japan’s economy. Furthermore, Japan does not contribute to global economic growth as the Japanese economy has been stuck in the doldrums for over a decade.

Without a doubt, the financial markets have reflected the uncertainty in Japan. Social unrest in Libya and elsewhere in the Middle East have only added to the volatility as the Dow Industrial Average has frequently traded higher or lower by triple-digit margins on a daily basis. The major averages, including the S&P 500 Index, are currently trading just slightly positive for the year after starting out the year with gains of nearly 7% through late February. The markets would rather have quantifiable data to trade on; oftentimes the uncertainty causes more commotion than if there was a known negative impact.

The fundamentals of the U.S. economy continue to strengthen through all of these geo-political situations. Even the slow to recover job market is showing signs that some strengthening may be on the horizon. It’s our position that the global recovery remains intact. But, of course, that does not mean that occasionally the markets or world events will not cause us to question that thesis.

While we are mindful that the human tragedy is the greatest concern, we will continue to closely monitor the affected investments and our portfolios under management. As always, we are available to discuss our strategy during this time if you have any questions or concerns.

Sincerely,
Eddie Wilcox

What People Are Saying...

2011-03-13T15:59:00.000-04:00

I have received a number of emails over the past few weeks asking me to weigh in on the issues in Wisconsin because I "seem to be level-headed when it comes to politics..." Thank you for the compliment, and I certainly try to be open to all viewpoints (something I wish more people would be). The current issue is tough, but I do see the arguments from both sides.

Honestly, I am pro-worker but not always pro-union. This does not mean I am against the benefits that unions have fought for (quite the contrary), but when the union takes on a life of its own and vows simply to just protect itself and not the workers it is supposed to advocate for... I think that is a big problem. I am trying to skip the politics of unions altogether.

To let you see what others have said, I have gathered articles and editorials from various newspapers, and the first one is written by Wisconsin Governor Scott Walker.

How Well is Georgia's TRS Plan Funded?

2011-03-11T02:02:00.001-05:00

“How safe are my retirement assets?”

This is a question that everyone ponders, but as an active or retired member of the Teachers Retirement System of Georgia, you should know that your future pension distributions are secure. Is that one line answer really enough though? Today’s post looks at how well the TRS plan is funded.

Honestly, I have been thinking about this one subject since the end of December. I had a few potential educator retirees that asked to meet with me individually around the end of 2010/beginning of 2011. In preparing for my meetings, I decided to review the latest financial report and actuarial report for the TRS plan. While not many items had changed, I had no idea of the coming issues in Wisconsin that would cause even more frequent questions on the subject.

First, all of the information that I reviewed came directly from the TRS website (http://www.trsga.com/), and other than my comments regarding the information, anyone can easily find and review the information themselves in the Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2010. This is a “short” 62 page PDF that really can be informative if you want to get down to the details of the plan. The plan itself is audited annually (year end is June 30) by KPMG LLP with actuarial reviews by Cavanaugh Macdonald Consulting LLC that lag by one fiscal year (FY). Thus the report above covers the June 30, 2010 audit and the actuarial review of June 30, 2009.

In short, the plan is very strong with $45.989 billion in assets as of June 30, 2010 and an actuarial funding ratio of 87.2% through June 30, 2009. This is down from the June 30, 2008 actuarial ratio of 91.4%, but the decline in the equity markets through March 2009 was expected to hurt the ratio. Comparatively speaking, Georgia’s ERS and TRS plans are near the top of the nationwide averages of actuarial funding as of June 30, 2008 coming in at #9 overall with the average plan being funded at 80.5% (Standard & Poor’s - Pension Funding And Policy Challenges Loom For U.S. States – July 8, 2010). Performance wise, the TRS fund grew +11.1% in FY2010 versus losses of -13.1% and -3.4% respectively in FY2009 and FY2008, and over the past five years, the annualized return of the fund was +2.6%. Now that you have the basics, let’s start examining the details of the plan.

“How is the fund invested?” For the most part, the TRS fund follows a traditional 60/40 model. This means that 60% of the assets are in equities and 40% are in fixed income. This “balanced” approach tries to allow for capital appreciation in the stock market as equities grow, but with the safety of fixed income investments during tougher economic times. The fund will never keep pace with the S&P 500 as it moves up, but it should also not be as hurt as it drops. This 60/40 ratio is the “target” allocation, so since FY2005, equities have ranged from 55.2-61.8% and fixed income from 32.1-41.9% (there is also an “other” category that includes cash and receivables that will be the difference) of the total assets.

One of the questions that I am frequently asked is what stocks does the fund own. As of June 30, 2010, the fund’s top twenty holdings (ranked by allocation) were: Apple, Exxon Mobil, Microsoft, Johnson & Johnson, IBM, Procter & Gamble, JP Morgan Chase, Bank of America, Hewlett-Packard, Chevron, General Electric, Wells Fargo, Google, AT&T, Wal-Mart, Cisco Systems, Pfizer, Coca-Cola, Berkshire Hathaway, and PepsiCo. Obviously, these are all very large companies with some paying dividends, so the fund has tried to balance the growth stocks (Apple, Google, Cisco, etc.) with the value stocks (Johnson & Johnson, Procter & Gamble, Coca-Cola, etc.).

Contribution Rates - A piece of the puzzle that has been frequently overlooked until recently is the contribution rates of the employees and employers. This is a very important part of the puzzle as these contributions fund the plan for the current retirees and build a foundation for your own pension. Your TRS statement will never show the employer’s portion of contributions made for you, but this does not mean that it is not there.

Currently in Georgia, the employees (educators) contribute 5.53% for FY2011. Employers in Georgia currently contribute 10.28% for FY2011. (Note: The preceding contribution rates were corrected from the original post of 5.25% and 9.74% respectively). These figures are calculated based on actuarial tables, and they are reflective of the assumptions made by the actuaries for growth in the plan, salary changes, COLAs, retirees, etc.

The way I view the contributions are simple… if you want to receive your pension benefits later, it is better to make the small contributions now that will supply those. Comparatively speaking, my own 401k (not a pension) contributions are made by my employer and me, but are vastly different from the TRS contributions. I contribute 10% of my salary, and my employer “matches” the first 8% at a rate of 50% (4% max), so my total contribution is 14% with the lion’s share coming from me. Granted I have control of my 401k if I leave, but there is no defined benefit waiting for me when I retire…

In the end, what I hope you to take from this post is that the TRS plan is on good financial ground with annual audits to insure the plan is continuing on its current path. The employees and employers are continuing to make contributions to make up for the current unfunded actuarial liabilities (spreading the burden over years and years not at any one time). The fund invests in a good mix of equities and fixed income securities, and it is not simply doing nothing or gambling. None of this means that everything is perfect, but the overall fundamentals of the plan are a good guide for a long prosperous future.

Pension Options - The PLOP Discussed

2011-02-12T01:13:00.000-05:00

Starting in July 2004, when educators in Georgia were retiring and deciding on the various pension options, they were also given an additional option at the time of retirement - "you may also elect to receive a one time lump-sum distribution (cash payment) in addition to your monthly retirement benefit." This became known as a Partial Lump-Sum Option Plan or "PLOP" to most educators.

First, let me point out that the TRS's website does a very good job of describing the various options and gives an example. To go to the TRS site and "Educate Yourself" on the PLOP, please click here. This link takes you to the first of many pages detailing the option. Also, "TRS encourages you to seek assistance from a financial advisor and/or a tax professional. A PLOP used to enhance retirement income or savings may merit consideration. A PLOP used to purchase depreciable assets or used for leisure should be given careful consideration as these purchases may compromise long-term retirement income."

Now, let's back up to understand why I am discussing this subject. Essentially, I have received a number emails over the last few years questioning using a PLOP for various reasons. Unfortunately, there is not one simple answer that I can give to everyone because age, health, reason for the distribution, tax brackets, beneficiaries, other income, etc. all play a roll in making this decision. What I can say is that I have been told that people want to use a PLOP to: pay off their house, go on vacation, spend it, buy a car, a child's wedding, and to "control it." All of these ideas hold some merit, but when you are taking money from your retirement, you run the risk of hurting your future retirement income stream (your pension amount) and in the short term, you create a taxable event if the PLOP is not rolled over to an IRA account.

For example, if you take a $50,000 PLOP (as the TRS example explains) to buy a car and go on a once in lifetime vacation, you will be incurring a hefty IRS and Georgia tax, and you can take on an extra 10% if you are under 59.5. A rough estimate for a 55 year old taking a $50,000 PLOP to spend and not rollover into an IRA is easily $17,500 which is 35% (10% tax penalty, 20% federal, and 5% Georgia). Granted, this is just a rough estimate, so anyone's potential tax could be higher or lower than this estimate.

Now, I have also been asked about using a PLOP as a way to make sure that contingent beneficiaries (of the pension) receive some of the benefit of an educator's working years. I definitely understand this thinking, but I would argue that taking the full pension amount (using whatever option you choose) then buying life insurance instead may be a better solution. Yes, you are paying for coverage, but the potential payout to your beneficiaries may out weigh the costs.

Using the TRS example, a retiring, 60 year old male in decent health could get a $500,000, 20 year term life insurance policy for $246-298 a month (based on an on-line quote from eterm.com). This would mean that the retiree would still have at least $75 more a month than taking the $50,000 PLOP... and the $75 would increase every year based on COLAs.

In the end, the main idea in today's post is that there are various issues and options for a retiring educator to consider. A PLOP sounds like a great idea, and it could be in one case, but it could also hamper future retirement income beyond recovery in another case. This is why it is a great idea to sit down with a financial advisor and/or tax professional to discuss the options before any final decisions are made.

Investment Options for 2011

2011-01-31T10:00:00.001-05:00

In case you missed it, 2010 was another great investment year. The S&P 500 finished its second consecutive year with double digits gains increasing by 15.06% after being up 26.46% in 2009. The Dow Jones Industrial Average (DJIA) also had a very good 2010, and it has gained more than 80% off its March 2009 lows. These are some very impressive numbers, but what should you do now?

Well, if the last few years have not shown you that you should be invested and diversify, then I probably cannot sway you anyway. For those that do listen though...

"It is definitely hard to see what areas of the market will stage the best performance, so since almost all of you seldom make changes to your portfolios, you must continue to diversify your portfolio - if nothing else, rebalance from last year!" - January 2010

Yes, I said that last year, and I completely agree again. When you rebalance, you take money from your winners, and redistribute it across your portfolio. The winners give some money to the laggards, but your portfolio will get back to that target allocation that you set (hopefully, you have a financial adviser that is helping you make plans). Do not simply pile in to last year's winners, and hope for a repeat performance.

I have received a few emails asking about bonds and interest rates, and it should become an issue late this year or early next year. Essentially, why would someone buy a 30-year treasury bond at 4.5% or a 10 year note at 3.3% when they can buy the same things in a short period of time with a higher yield? With this in mind, I would suggest to look to other areas of fixed income for your allocation. Essentially, you want to try to limit the interest rate sensitive bonds in your portfolio if possible. A core/total bond fund, high yield bond fund, and an international bond fund should most likely all fare better than a US government bond fund this year.

For those that continue to complain about CD rates, I am sorry, but you are in for another year of pain. The Federal Reserve will most likely not raise rates until the end of the year or early next year, so money market rates and CD rates will stay extremely low.

As for the equity holdings, I have preached and preached about diversification and about my favorite area - mid caps. Make sure you have a good mix of large caps, mid caps, small caps, and international holdings in your 403(b)/457 accounts - and understand what those allocations should be.

Finally, I cannot stress enough the importance of research and seeking qualified advice. When I manage money for my clients, I look at what has changed in the market, economy, and with them. I may make numerous trades in a year or just a few, but there is always a reason behind it. I have read a number of emails that point to parents, neighbors, friends, and/or colleagues as sources of advice and information. While I am sure that all of these people mean well, the vast majority most likely do not have the experience or knowledge to really guide you through to retirement and beyond. Would you go to your bank for medical advice? So why go to your neighbor for financial advice? Find a qualified professional to help you set goals, allocations, and understand your retirement.

For 2011, Wall Street analysts are forecasting another good year in the stock market as the economy continues to improve, and I know we would all like to see continued improvement and positive returns.

Where Do We Go from Here?

2011-01-27T12:37:00.004-05:00

I always find it interesting the emails that I receive from my "little" blog. What started as a way to help some friends has grown more than I ever thought it would.

I have received questions regarding pensions from 39 states, more WEP/GPO questions and comments than I can ever count, numerous inquiries about retirement accounts and investments, and various other subjects that range from personal to the implausible. Honestly, I really do read each and every email and try to answer them or direct them to someone who can.

I have covered many subjects on retirement accounts (403b, 457, 401k, etc.), and I can only say "save" so many times, so I have tried to answer those questions individually. If you want to see what I have written before on the subject simply use the search feature on the blog (even I do).

So, I have been gathering a few emails that mentioned topics for me to cover, and I think I will start there:

Investment Options for 2011 - It seems that a number of people have liked my breakdowns in previous years of the investment options for 403(b) plans, so that will be covered first.
Pension Options - The PLOP Discussed - I have received a few questions about the PLOP option available under the TRS of Georgia plan.
How Well is Georgia's TRS Plan Funded? - Numerous news articles have been highlighting the issues of pensions around the nation, so I will discuss Georgia's own TRS plan.
A Suggestion for Employers of (Georgia's) Educators - After talking to numerous educators over the years at various stages of their employment and retirement, I have a suggestion to pass along.
Arguments FOR the WEP/GPO - I can already feel my inbox filling up after this one, but unless you know the arguments for the WEP/GPO, can you really argue intelligently against it? Before I even start... I am against the WEP/GPO in almost every case.

Ok, the above is my game plan for future posts, so if your subject isn't covered, let me know. I will try to work on it individually or down the line for everyone.

Thanks for your comments, suggestions, and questions, and I wish you all only the best.

Yes, I Am Still Here...

2010-09-05T12:25:00.000-04:00

Hello again everyone... I hope that your school year has started off well, and I know that everyone is happy to have a bit cooler temps, the start of football season, and your schedule back to "normal."

I obviously have taken some time off over the past few months, but I did not go away. I want to thank those that emailed and "checked" on me to see if I was fine. My favorite email came from a subscriber that was worried that I had passed away... She was very happy when I responded. I did get a chuckle though.

I have had a number of emails about the various happenings with the stock market, TRS, WEP/GPO, and more. I responded to all of them within a very short period of time, but I chose not to post a blog.

Over the next month, I will be doing some research on various topics, and if there is something you would like for me to cover for you, by all means please email me (rschultz@rollinsfinancial.com).

By the way, one item that was brought up in a recent email was the $250 deduction for "eligible educators" for qualified expenses. This item was originally passed in 2006 and expired in 2007. It was extended late in December 2008 to cover tax years 2008 and 2009, and it has expired again. While it is not a "done deal," I would imagine that it will be extended again when Congress and President Obama make the now annual changes to the AMT tax. While this is by no means a guarantee, it is hard to imagine a Congress and President not extending this benefit to educators.

I wish all of you well, and thanks for all of the emails.

Retiring at the End of This School Year?

2010-03-27T12:59:00.000-04:00

If you are retiring at the end of this school year, you have been counting down to this moment for probably the last 30 years. You have been dreaming of the days where you would be free from your profession while collecting a nice pension. Relaxing, traveling, or starting a second career are all within your grasp... yet, take some time to make some final plans first. There are several decisions to make, and all of them can have lasting impacts on your life and retirement.

First and foremost, there is your Georgia TRS pension. The best thing to do is to make an appointment with TRS to discuss your benefits and options. By all means, please listen to the various options. Once you start on an option, you cannot simply go back and change your mind later. For instance, if your pension will be the backbone of your retirement and your spouse's retirement, please look at the various joint options. Do not think that since Plan A offers you the most money that it is the best option. Think of your spouse and family, and by all means, consult with an advisor.

Depending on whether or not you contributed to Social Security, you should also look to meet with them to discuss your potential benefits at full retirement age (FRA) or early retirement. Social Security really is one of the services that goes out of its way to help answer questions and project your benefits. You may have an opportunity to help yourself by working part-time in between your retirement and collecting benefits, or you may be somewhere around the maximum you will collect, but the main idea here is to have some projection and not be surprised later.

Your other retirement accounts like a 403(b), Roth 403(b), IRA, or Roth IRA also need to be reviewed. If you plan on taking distributions from these accounts, there are tax implications and diversification changes that need to be considered. There is a big difference between being 52 and 60 when discussing these possibilities, so research, an accountant, and an advisor are definitely important.

Also, your current retirement account provider may try to "sweeten the deal" and have you make changes to your accounts that could have an impact later. Research any offers and really try to ask questions about surrender charges, fees, liquidation rules, withdrawal guidelines, etc. These companies have been pretty notorious about not disclosing the hidden fees and explaining the ultimate changes that are being made to your account.

If you need a job to allow your finances to work, then start making those contacts now. I know of several retirees that took part-time jobs to supplement their pension. They found something they enjoyed, and they started doing it.

Finally, make plans. Make plans to do some of the things you couldn't before and enjoy your life. My last bit of advice though is to try to make sure that you have thought things through. If your plans will require some extra funds, then plan how you will be able to make it work.

Congratulations! You worked hard to get to this point so enjoy it.

The Issues Facing Us - National Level

2010-03-12T10:53:00.000-05:00

Being a student of history, this past year has been one fraught with huge national issues for President Obama and 111th Congress. From tackling a financial crisis (that President Bush and the 110th Congress started battling) to healthcare and global warming to unemployment, it has not been an easy term.

The "mood" of the nation has changed somewhat over the past year as well. The promise of change and excitement of the first minority President has given way to more partisan politics from both sides. The Republicans stand to gain numerous seats in the House and Senate based on the current polls, so there is a "push" to get various bills through Congress and on the President's desk. No matter which party you are for, the stalemate in Congress has both good and bad consequences.

Honestly, there does need to be a reform of the healthcare and financial systems. On healthcare, costs are spiraling out of control for numerous reasons, and the drug companies, insurance companies, legal system, and uninsured are all to blame in some part. Does a fix exist? I personally fail to see how a government run healthcare system can be any more efficient due to the layers of bureaucracy that are sure to follow, but I also understand the notion that insurance companies are out to make a profit. As with various industries though, who is to say what margin is out of line?

On the financial front, there is much needed reform. Previous administrations and Congresses urged home ownership for all, and with that, safeguards were lowered to allow those with riskier credit to own homes. Home ownership boomed and was lauded by politicians, but it was eating away at the credit worthiness of consumers and banks. When it crashed, it took numerous industries and jobs along with it. Over regulation will stifle growth, but deregulation will sometimes exaggerate it. There needs to be a good mix to allow risks to be taken, but risks that are minimal and do not threaten the system as a whole.

Unemployment stands at 9.7%, but there is no "quick fix." What most Americans do not realize is that it is the economic cycle that will drive unemployment. As the economy starts to grow, employers continue to be slow to hire new staff, but as the current staff gets overworked and starts to fall behind on productivity, employers will start hiring again. The same is true in downturns. Employers hold on to employees longer than they should thinking things will change until they finally have to lay people off. We are currently in the beginning of the growing economic cycle, but it could still be another six months before employers really start to rehire employees. Not great news, but it is better than still being in the downturn.

On the Social Security front, I continue to receive emails regarding WEP/GPO reform. Unfortunately, I can almost 100% guarantee that Congress will NOT tackle this issue prior to the elections in November which means it will be pushed on to the 112th Congress (starting next January). We all know that Social Security needs to be reformed, but with other pressing issues on President Obama's plate, I do not see a way that this issue moves to the forefront. Healthcare, financial reform, and the economy are too large to bring up another large issue - Social Security.

Finally, I had a good discussion with an old college professor a few weeks back. While I was in college and grad school, we would frequently discussed politics, so this was a trip down memory lane for me.

Anyway, one of the points that both of us came to was that when you have one party controlling both the Executive and Legislative branches, it is not always a good thing.

Numerous commentators have pointed to Obama as being very liberal, but if you will look at some of the things that he has said recently, you will notice he has started to try to move a bit more towards the middle. The current problem though is a super majority in the House headed by Speaker Nancy Pelosi, and a majority in Senate headed by Majority Leader Harry Reid. The House generally puts forward much more liberal bills that cannot pass through the Senate, so you run into a wall.

Our discussion focused more on former President Clinton and Newt Gingrich though. They were "adversaries," but they needed to come together to get items through Congress and to be signed by the President Clinton. Clinton and Gingrich could both stand their ground, but when push came to shove (like the budget) the two had to come together to make things work. I know it is a strange concept nowadays.

As we look at a potential change in the structure of Congress next term, will it actually be a positive? Would the need to make things more bipartisan help Obama and Congress? Time will tell, but history tells us it may be so.

Next up... State level issues...

2010 Investment Options for Your 403(b)

2010-01-25T09:15:00.001-05:00

In early January 2009, I wrote:

"In 2002, the the S&P 500 lost 23.37%. At the beginning of 2003, the market continued to trend lower, and a funny thing happened, it turned around. By the end of the year, the S&P 500 had gained 26.39%.

I am not saying that 2009 will be a spectacular year and everything will be rosy, but if do your research and diversify your investments, you will at least be giving yourself a chance to participate."

If only I could predict the lottery numbers every week that well!

In the end, the S&P 500 gained 26.5% in 2009 which is almost exactly what it did in 2003. There are few similarities as to why the market turned around in 2003 and 2009, but it did.

Early in 2009, the market was just completely oversold. Everyone was so worried that every single company was going to go out of business that they quite literally sold everything (including bonds and preferred stocks). When the turnround came, it was strong.

Moving forward into 2010, it is definitely hard to see what areas of the market will stage the best performance, so since almost all of you seldom make changes to your portfolios, you must continue to diversify your portfolio - if nothing else, rebalance from last year!

Do not load up on international funds just because they had the best performance in 2009. International funds are somewhat more volatile because the international markets are more volatile, but there is also the currency trade which can help or hurt the fund's performance. If you wish to be more aggressive, adding a bit to your international holdings is a great way to accomplish this goal, but do not over do it!

On the bond side, just like in 2009, investment grade and inflation protected bonds (TIPS) look to be some of the best options. Government bonds should do poorly again in 2010 just like they did in 2009, and there is just about zero reason to be in them right now.

As I said last year, "As for the rest of the account, you really need to continue to research the funds that you have available. A good diversification model that would now include the investment grade and inflation protected bond funds would be excellent. Remember that if you only look at last year, you will be missing the point. Look at good and bad years, look at changes in the managers, etc."

If you look back through history, the second year of a recovery is generally not as spectacular as the first year, but it is usually still a good year. The goal here is to reap returns when we can and mitigate the losses in a bad year. Keep that in mind, and you will almost assuredly do better than those that try to time the market.

I wish everyone only the best in 2010, and I hope it is a very prosperous year for all of us!

Welcome to 2010!

2010-01-17T12:53:00.000-05:00

Welcome to 2010! The new year has started much like the old year finished with a market steadily moving forward. Whether you believe the market is headed higher (a bull) or the market will go lower (a bear), how should you be playing the market and economy?

I have spent the last month or so researching the trends and patterns of 2009, and in some cases, I have gone back to previous economic downturns to try and find similarities to see how things moved forward. Yes, it is that history buff in me that leads me to research the past, but it is sometimes weird how the present really will look like the past.

Over the next few weeks, I'll be writing about investing options for 2010 (I had a similar post in 2009 that worked out very well - 2009 Investment Options for your 403(b)), the various issues facing President Obama and Congress, and then a post on planning for retirement for those retiring this year.

All in all, I hope that everyone had a great holidays and first two weeks of 2010. I look forward to a great 2010, and as always, if you have questions or comments, please by all means email me. It really is some of your own questions that give me ideas to discuss in future posts.