Ohio teachers face a new retirement timetable that will go into effect this summer and affect how many years they are required to work, as well as how much they can collect when they retire. It’s creating a lot of stress for all teachers, particularly those close to retirement, says Randy Lupi, a financial professional at AXA Advisors, LLC.
The major change is that instead of being required to work 30 years, teachers will now need to work for 35 years and be at least 60 years of age before they can retire and collect an unreduced pension benefit.
“If a teacher is currently at 35 years with continuous Ohio service credit in the State Teachers Retirement System (STRS), they will receive 77 percent plus an extra bonus of 11.5 percent when they retire,” Lupi says.
“Unfortunately, the 11.5 percent bonus is being dropped after July of this year. A teacher who has less than 35 years as of July will no longer be eligible to receive the bonus. Many teachers decided to work over 30 years due to this incentive.”
Smart Business spoke with Lupi about the STRS changes and what options younger teachers have at their disposal to modify their retirement plans.
What else is changing with the STRS?
The final average salary (FAS) is currently calculated based on the three highest years of earnings. Going forward, the FAS calculation is being changed to cover the average of a teacher’s five highest years of earnings, which can result in a lower base figure. Also, the contribution requirement of a teacher has increased from 10 percent to 14 percent of their current salary, impacting cash flow for all teachers.
These changes were implemented by The State Teachers Retirement Board to make sure the pension system remains solvent.
What is the lesson for teachers?
These changes make it even more important to begin retirement planning several years in advance. Some teachers delay saying, ‘I’ll just go to the STRS and they’ll tell me my options’ or ‘I’ll just choose the highest payout.’
The pension election is irrevocable, so all options should be considered before a final decision is made. Teachers should start planning at least three to five years prior to retirement and consider their pension options based on their lifestyle and that of their spouse. They also should consider how their choices will affect their beneficiaries in addition to themselves.
What is the partial lump sum option (PLOP)?
The PLOP allows the STRS member to receive six to 36 months of their fixed benefit upfront.
The STRS will then pay the member a reduced monthly pension benefit. Teachers have been funding their pension by contributing at least 10 percent of their pay throughout their career. By electing a PLOP, they are essentially receiving part of their initial contribution back in the first year of retirement. Teachers that elect the PLOP typically roll the funds over into another pre-tax retirement plan like a traditional IRA or 403(b).
What are the benefits of the PLOP?
In certain circumstances, the PLOP allows teachers to better manage their taxable income at retirement, maintain control over the money and designate beneficiaries on the money. Some teachers will keep their investment conservative while many will maintain a balanced portfolio in efforts to grow their nest egg.
Many retired teachers still enjoy working and may have income from a new second career. By electing the PLOP, they are able to choose not to receive taxable distributions from their PLOP investment until they are truly ready to stop working and settle into retirement. Not taking distributions may help to better manage their taxable income, especially if their spouse is still working.
There are many variables to be considered before making any decisions regarding retirement plans. Teachers should get all of the facts before making these decisions. Consulting a financial professional may help them better understand the options, and the potential results of those options. ●
Insights Wealth Management is brought to you by AXA Advisors, LLC
