Don't Blindly Follow The Herd

Herd mentality is a strong part of our society. How many times have you ever seen people join a line, just because they see others in it? As a society, we often have a fear of being different or missing out when it comes to social norms, but that should not carry into our financial life. What works for your coworker, your neighbor, your brother or sister, or what worked for those ahead of you, like your boss, or your parents, doesn't mean it works for you. This is also the case when it comes to FRS members planning retirement.

Would you take construction advice from a musician? Or would you take plumbing advice from an electrician? If your answer is "no" then why is it that we see so many FRS members take financial and retirement planning advice from their coworkers? Has your coworker earned a professional credential in the financial field? Or is this case more like two electricians taking plumbing advice from one another? Just because the two of you are familiar, and share commonality does not mean that your goals are the same, that your beneficiaries are the same, that your risk tolerance is the same, or that your retirement plans are the same.

For example*, if you and your coworker are both FRS pension plan members, and your coworker recommends that the only way to protect your spouse if you were to pass away early in retirement was to choose Pension option 3, would you blindly follow? Here's an example of where that can cost you for following that herd mentality.

*Imagine you and your coworker are both 60 years old, and you've both been working together at the same job as coworkers for 30 years, earning the same pay. You are both planning to retire at the same time, and both of you have the same pension calculation under option 1 which covers only you and not your spouse for $2,500 per month. Your coworker's spouse is also 60, but yours is 50. Your coworker looks up his benefits, and sees that his option 3 benefit which includes their spouse is reduced only to $2,350. So he tells you that you should do the same. The difference is, because your spouse is 10 years younger than your coworkers, your calculation for your option 3 benefit to include your spouse is less. Instead, your pension benefit per month is only $2,100 per month. A whole $250 per month less than your coworker. This only multiplies when we add DROP. Let's say you and your coworker both decide to work for 5 years in DROP. Your coworker's DROP would be worth $152,740. when he retires, but yours would only be $136,491. That's over $16,000 less from DROP.

Had you taken the time to evaluate your own options, one alternative you may have found is purchasing a term life insurance policy to cover your wife if anything happens to you, and instead taking option 1 for the full $2,500 per month. If the insurance costs you $150 per month, then you still net the same income as your coworker, still have benefits for your spouse from the insurance, and instead your DROP would be based on the $2,500 per month amount, giving your DROP a boost to $162,489, almost $10k more than your coworkers. Additionally, in the event your spouse were to pass away instead, you can simply cancel the insurance and continue to receive your $2,500 per month from your pension.

This is just one of many examples we have seen of FRS members taking retirement planning advice from peers, not professionals. This happens in many other cases as well like the ones listed below:

• Individuals who go into DROP because their coworkers did
• Individuals who don't properly or fully evaluate comparing the pension plan to the investment plan because someone tells them investing is "a bad idea"
• Individuals who think their benefits or vesting schedule are based on what their bosses are, who were hired under a different set of rules then are in effect today
• Individuals who believe their cost of living adjustment will be the same as those who they know who are retired, not factoring that their COLA was changed in 2011 and is diminishing as time goes on.

When it comes to planning retirement from the FRS, I'm not saying you shouldn't discuss your plan with your coworkers, but I am saying you shouldn't let others tell you how you should retire. As an individual, you have your own priorities and needs that should be addressed with a professional.

If you have questions about your retirement plan, we are happy to help. Click below to schedule a meeting with one of our representatives who will be happy to answer your questions.

*This hypothetical example is for illustrative purposes only, and its results are not representative of any specific investment or mix of investments. Actual results will vary.

Source: https://www.mybenefits.myflorida.com/financial_future/frs_pension_plan#