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Our team at Ascend Advisory values and thanks our community’s first responders, educators, and public employees for their service and dedication to our friends and families. They are the best of us, and often as public servants put the needs of others ahead of their own. For their sacrifice, they deserve a retirement that makes them proud. However, many find the state retirement system to be confusing and hard to understand. We are here to help.
The Ohio Retirement system is extensive and is currently made of five distinct parts. These parts include the State Teachers Retirement System (STRS) which serves teachers in public schools, colleges, and universities; the Public Employees Retirement System (PERS), created for state and local government employees; the School Employees Retirement System (SERS), formed for non-teaching school employees; the State Highway Patrol Retirement System (SHPRS); and the Ohio Police and Fire Pension Fund (OP&F). For this article, we are going to focus on one of the most asked questions we receive in regards to PERS and STRS which is the Partial Lump Sum Option Payment (PLOP) and whether taking the option is right for you and your family.
First, let’s discuss what a PLOP is. Traditionally, someone participating in PERS or STRS will receive a monthly benefit at retirement based on their time served and salary similar to a pension. The PLOP is an option at retirement that allows a recipient to receive a lump sum payment along with a reduced monthly benefit instead of the traditional monthly amount. If someone chooses to use a PLOP, the lump sum payment must be between 6 and 36 times what the original monthly benefit of your PERS or STRS plan would have been had a PLOP not been selected. The PLOP must also not result in a monthly benefit that is less than 50% of that original monthly amount. In addition, the total amount paid from the lump sum and the new monthly benefit shall be the actuarial equivalent of the amount that would have been paid had the lump sum not been selected.
A PLOP payment processes no earlier than 91 days after your retirement date or when all necessary information is completed, and your retirement benefit is finalized, whichever is later. In terms of receiving the lump sum payment there are a few options. Should someone elect to receive the benefit directly, the PLOP payment would be an immediate taxable event. The funds would be taxed as ordinary income in the year they are distributed, and potentially an additional 10% tax if you have not yet reached the age of 59.5. Keep in mind that the PLOP amount you are eligible to select and the effect of the PLOP on your monthly benefit will depend on various factors such as you and your beneficiary's age at retirement, how you choose to collect the PLOP, and the amount you wish to receive as a lump sum payment.
When deciding if taking a PLOP is the best option, there are a few things to consider. The first should be the cost of living and whether the original monthly benefit will be able to keep pace with inflation. Presently, there is no guarantee that PERS and STRS will grant an annual Cost of Living Adjustment (COLA) and any adjustments must be approved. PERS, for example, has a maximum COLA directed by state law currently capped at 3%. If either fund from PERS or STRS runs into solvency issues in the future this may affect the programs ability to grant COLAs moving forward. Taking a PLOP and investing the proceeds into an IRA, for example, could be a hedge against such a scenario. As long as the underlying investment selection aligns with long-term capital appreciation to possibly beat inflation. However, this does come with additional investment risk, which may or may not be appropriate.
A person’s health and longevity in the family are also important factors to consider. If poor health or shorter longevity is a concern, it may be better to take the PLOP in order to enjoy the benefits of retirement now instead of waiting. This is a similar thought when considering when to start social security income. That said, if longevity runs in the family having a larger guaranteed source of income may be a very attractive option. Another consideration is if you already have significant financial resources there may be less of a need for another source of lifetime income. Money from the PLOP, if distributed directly to the recipient, could be used to pay off debts such as a mortgage. However, this again will be a taxable event.
Whichever path you take for your retirement when it comes to the PLOP it is important to review it with a professional. We would recommend everyone take the time to sit down with their financial advisor to choose the best option for their retirement. The Ohio Retirement system is extensive with over 2 million people involved in one of the five parts like PERS and STRS. Chances are we all know someone affected by the Ohio Retirement System and if you or someone you know is in need of support weighing the options and planning for retirement our team at Ascend is here to help.
Disclosures and additional information:
Although this information has been obtained from sources that we believe to be reliable, we can’t guarantee the accuracy or completeness. This information is not a complete description of your plan’s features. Plan information is subject to change. For full plan description or to ensure these are still accurate, please request a Summary Plan Description from the Plan Sponsor or Recordkeeper.
When you move your money to your new qualified employer sponsored retirement plan (QRP), where it can continue its tax advantaged status and growth potential for retirement. Your new employer's QRP may not allow you to move assets into it, so you need to check the plan's rules.
When you take a lump-sum of your qualified employer sponsored retirement plan (QRP) assets you will generally owe ordinary income taxes and possibly a 10% additional tax for early or pre-59 ½ distributions. While you will have immediate access to your retirement money you could lose a significant amount to taxes and the tax advantaged opportunities are lost with this option.
Please keep in mind that moving assets to a new employer’s QRP is just one option for your retirement plan. Each option has different advantages, disadvantages, investment options, and fees and expenses which should be understood and carefully considered. We recommend you consult with your current plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
Please keep in mind that taking a lump-sum is just one option for your QRP. Each option has different advantages, disadvantages, investment options, and fees and expenses which should be understood and carefully considered. We recommend you consult with your current plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
Investment products and services are offered through
Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Ascend Advisory Group is a separate entity from WFAFN.
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