Why You Aren't On The FRS Investment Plan

When was the last time you actually considered your FRS options? We have many conversations with FRS members who haven't ever compared their plan options side-by-side. Usually, these members end up telling us "no one ever explained this to me like this before". Well, that's the reason why some FRS members aren't on the investment plan. Simply because they don't honestly understand how it works to create income in retirement.

Let's compare the plans with a hypothetical example.

Option 1, the pension. Paying $25,000 per year, without a beneficiary, or with a spousal beneficiary of $22,500 per year.

Option 2, the investment plan. A lump sum benefit of $400,000. 

How are they similar? Perhaps in more ways than you think. 

1. They both are taxed as ordinary income when you make withdrawals/receive benefits.

.2. Both have their underlying investments in the market. In the investment plan, the member has a choice of fund options to choose from, and in the pension plan, the FRS invests the pension fund in the market.

3. They are both considered employer retirement accounts.

4. They both require a 3% employee contribution. In the pension plan, the employee contributes to the main pension fund, and in the investment plan the member contributes the 3% to their own account.

5. They both make the member eligible for the FRS Health Insurance Subsidy Benefit.

So what is the big difference? There are mainly two.

1. The largest difference is that though they both have funds invested in the market, in the pension plan, the state chooses how the money in the pension fund will be invested, and in the investment plan, the member chooses for themself. 

2. How the income is paid to the member. In the pension plan, the member receives a benefit based on a fixed formula (Years of service x risk class multiplier x average of final compensation = benefit). On the investment plan, the member pays themself a monthly benefit from their lump sum account. This is where we find many FRS members don't feel they uncomfortable. We often hear people saying things like "Well, if I take out $25,000 a year from my $400,000 to pay myself like the pension, I'll be out of money in 16 years." Well, if you put the money in a 0% savings account, you'd be right. The idea of the investment plan is for the money to be.... INVESTED. So, let's say your average annualized rate of return is *6.5%, then you would earn $27,000 per year in interest, and 10, 20, 30 years later, you still have your initial $400,000 in principal. 

*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.

So what should you choose? Well, that's a really individual choice. The investment plan isn't suitable for everyone, and the same could be said for the pension plan. What I would say is applicable to everyone is investigating what both options are worth to you. If you'd like to learn more about how to find those numbers, or have questions about retirement, you can schedule a call with one of our representatives by clicking the button at the top of this page and we will be happy to help.