Retirement! You have made it! No more PSSAs or Keystones, no more repeating directions 12 times, and you can go to the bathroom whenever you want! You’ve earned the freedom to set your own schedule and live life on your terms. But first, you’ll have to make one of the biggest financial decisions of your life. What pension benefit election should you make?
The Public School Employees’ Retirement System (PSERS) allows for various payout options. You can take the maximum monthly benefit paid to you over your lifetime. You could take a reduced monthly benefit to enhance your death benefit. You could have monthly benefits continue upon your death to your survivor (often a spouse) at 100%, 50%, or a percent you specify if you die first. The best decision for you is personal, taking into account your life expectancy, family situation, finances, etc.
The second key decision is do you roll your contributions and interest out of the plan or should you keep them in the plan to increase your pension payout? In our experience, most financial advisors recommend that you roll the money out of the plan and into a retirement account, but we find that’s often NOT what’s best for you! It’s important to recognize the potential conflict of interest in their advice. Why? Because managing or investing that money is often the way those advisors get paid. If they recommend you keep your money in the PSERS plan, those assets aren’t available for them to invest or to generate a fee or commission from. That’s not to say it never makes sense to take the money out of the plan, but you should recognize the potential conflict in that the advisor may have an economic incentive to recommend you take your money out. Given the importance of this decision in that it impacts your income for the rest of your life (and potentially your beneficiary after you), it is not one you want to take lightly. (Click here to learn how to vet your financial advisor).
When we run the numbers to evaluate if it’s better to leave your contributions in the plan or not, we generally find that by leaving the money in the pension system you are getting an approximate 8% rate of return. That’s an 8% rate of return with essentially no investment risk!
If you have a reduced life expectancy, it may make a lot of sense to take your contributions and interest out of the plan, but for most people, we find big advantages in leaving their money in. Congratulations on earning your retirement benefits! If you’d like a second opinion in determining which PSERS options are best for you, contact us! We’d be happy to help.