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.
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.
