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Helping Heroes Retire

Helping Heroes Retire

The question: FRS Pension or FRS Investment?

Posted on January 14, 2020 by Steve Olson

by Steve Olson

PUBLISHED IN   Florida Cops Magazine

What is the FRS Pension Program?

“Traditional” Defined Benefit Pension.

Calculated using a pre-defined formula based on:

  • The number of years you are employed.
  • Type of employment (Special Risk- 3 percent per year – or Civilian).
  • Your average final compensation (average of the highest five earning years).

When you retire, you receive a fixed monthly pay check guaranteed by the state which may have a cost-of-living adjustment (COLA), depending on when you were hired

(the Florida State Legislature stopped the COLA adjustment credits in July 2011).

Depending on the option you select, you may receive a reduced benefit, so your spouse may continue to receive the benefit upon your death.

What is the FRS Investment Program?

401(k)-style plan similar to what you would find in the private sector.

No guaranteed monthly payment for members and their spouses.

The employee’s retirement is solely reliant on both their employer’s contribution and their contribution to the programs, along with the performance of the investments they undertake.

How much does the employee contribute to each plan?

No matter which plan you choose, you, the employee, contributes 3 percent of earned wages. However, if you are in the pension program and enter the DROP for five years, you don’t have to pay the 3 percent of your wages while you’re in the DROP. If you earn $100,000 a year, this alone could be a savings of $15,000 or more.

How much does the employer contribute to each plan?

For Special Risk:

Pension: 22.04 percent of wages Investment: 11 percent of wages

For Civilians:

Pension: 7.26 percent of wages Investment: 3.3 percent of wages

Who should consider converting to the FRS Investment Plan?

Generally speaking, you may (depending on the circumstances) benefit from converting to the Investment Program if:

You have a major health issue and are confident that your life expectancy will be reduced based on that condition.

You are unmarried, ready to retire and don’t want to leave the state your retirement earnings when you pass.

You have inherited or accumulated enough assets to live comfortably off the income from those investments without a need for the guarantee of the pension.

You live in a two-pension household (you and your spouse both have pensions or you have a pension from prior employment).

You had high wage growth early in your career and plan to work for 10-15 more years. For example, sergeants, lieutenants and captains who reached that milestone at

18-22 years of service and plan to continue to work until 33- 35 years of service. (Due to the way FRS calculates the conversion amount, they may have more than $1 million starting balance with the ability to grow that money for an additional 12-17 years which may allow them to exit with significantly more money).

Remember: Everyone’s circumstances are different and deserve careful analysis and consideration. Once you convert and use your second election, you cannot change programs again. This is a very important decision and you should seek advice from a financial advisor prior to making it.

Who should not consider converting to the FRS Investment Plan?

Anyone who doesn’t sleep well with market volatility (the ups and downs of the market).

Anyone who is not disciplined with their spending (if you spend too much, too soon you will run out of money).

When should you consider converting?

Most people should not consider converting until they are ready to retire or can no longer work due to a medical condition. Often times, the circumstances we live in change, and it is not best to make such an important, irrevocable decision based on “unknown factors” such as health, divorce or the current market’s performance (since the recovery began in 2009).

Remember, your spouse or child under 25 years of age will receive the Option 3 Benefit of your vested pension until you choose a pension option and either DROP or retire. And if you die on duty, they will receive 50 percent of your current monthly salary tax-free.

The exception to this is those high earners and people who are 60 or older and still plan to work for a few more years.

If I convert to the FRS Investment Plan, how does FRS calculate what the value of my account will be?

Despite popular belief, FRS does not have a “separate” account for each employee in the pension plan. The starting amount of your initial FRS Investment Balance is based on an advanced calculation of the “Net Present Value” (NPV) of your pension.

To put it simply, it is based on the following:

  • Your age (expected mortality).
  • Your Average Final Compensation (AFC) or highest five years of earnings to date.
  • Whether you are a Civilian or Special Risk.
  • Years of service.

It is possible that as you work longer (and grow older), the value of your FRS Investment account when you convert can actually go down, as opposed to up. This needs to be carefully evaluated to determine when the right time is.

What should a new employee consider when deciding between the FRS Pension and FRS Investment programs?

How long do you plan to be employed for?

Do you have promotional ambitions and how realistic are they? (Promotions mean more money, which means a higher pension).

Do you have the knowledge/expertise to make wise investment decisions, or are you working with an advisor who will help you benchmark your retirement progress?

It’s 401(k) Style – why not keep your pension (guaranteed by the state of Florida) and make additional contributions to your Deferred Comp – 457(b) to supplement your retirement income?

How confident are you the State Legislature will never add the COLA back to the FRS Pension Plan in some form?

If your investment program doesn’t keep up, you may not have enough money if you decide to switch to the pension plan later in your career.

Finally, ask yourself: Can you tolerate swings in value or did you get into this profession for the “guaranteed” benefits? Would you rather “adjust” to changes as they come to you, or make a decision based on the current “anti-pension” environment that may impact your career 15-20 years down the road?

Depending on the answers to these questions, you may or may not be able to grow your investment account quickly enough to produce the income your pension would provide. Either way, if you’re entering employment now or early in your career, your pension or FRS Investment balance likely will not be enough. You will have to have additional investment retirement funds.

When I retire, will I earn more monthly in the Pension or Investment Program?

I hear of a lot of false hopes created by advisors that overpromise investment performance to their clients (as if they can control the market). The Certified Financial Planners board and the research of many other retirement analysts throughout the industry believe that with an investment portfolio of 50 percent Stock Funds and 50 percent Bond Funds, you can pull approximately 4 percent off the portfolio per year, with a small cost-of-living adjustment, and the money should last you approximately 30 years.

So, what do you think?

If your pension is based on a $100,000 average final salary and you are retiring after 25 years of special risk service, you will earn $75,000 per year in retirement (plus a COLA if you were hired prior to 2011);

$75,000 pension divided by 4 percent off your Investment Portfolio if you were in Investment = $1,875,000 needed

Yes, you would need approximately $1,875,000 to provide the same benefit over 30 years, and if you live beyond that, well you may have some financial issues.

Now, if that same pension member did five years in the DROP (assuming no COLA, for simplicity), that is an extra $375,000 ($75,000 multiplied by five years). So, the investment member now needs

$2,250,000 to have the same income during retirement. The reality is that most FRS Investment members will not leave with this amount of money without proper planning and investment oversight, even those waiting to convert when they retire

Steve Olson, CFP ®, AEP®

CEO of Atlantic Wealth Partners | Contributor

Steve Olson’s experience spans over a decade of focued tax planing, legal strategy interpretation, investment management, and advisory services to wealthy individuals and families throughout the U.S. Over the course of his still young career, Steve provides counsel and management on individual assets and portfolios ‐ encompassing a combination of securiteis, real estate, privately held businesses and thoer altenative investments ‐ ranging in value from $5 million to over $400 million in value. Steve is currently the Founder and CEO of Atlantic Wealth Partners in Jupiter, FL.