Chapters

00:00 Understanding COLA and Retirement Options

02:03 Consideration #1 - Irrevocability

02:52 Consideration #2 - Cash Flow and Budgeting

03:50 Consideration #3 - Taxes

Transcript

Hi everyone, I'm Ryan Earley, host of the PERS Pro YouTube channel. In our recent COLA series, we've broken down what the cost of living adjustment is, who is eligible, how to calculate your COLA amount, and walked you through the annual COLA notice. If you missed those videos, please check them out, videos two through seven.

But the COLA notice brings up a huge question that new retirees face. Do you take your annual COLA as one big lumpor spread it out in monthly payments? Today we're diving into this crucial retirement decision, a choice you need to get right. Let's get started.

Before we dive in, make sure you hit that subscribe button down below so you don't miss any of our future content. Our goal with this channel is to provide you with short, easy to understand,financial education videos that are relevant to PERS members like you.

Disclaimer, this video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal advice specific to your situation.

When you retire, you have the option to choose whether to receive your COLA monthly or in a lump sum paid each December. Absent an election to choose otherwise, PERS by default will pay your annual COLA as a lump sum. Let's compare these two options against one another.

The lump sum option delivers the full annual COLA amount in one payment in mid-December. This is how it got the name 13th check. The monthly option spreads that same annual COLA amount into 12 equal installments that are added to your regular monthly benefit check starting each July.

So should you choose lump sum or monthly? Well, there are three major considerations to take into account when making this decision.

The first and by far most critical consideration is the irrevocable nature of the monthly payment election. PERS rules and regulations are very clear in the retiree handbook and on Form 20. If you are currently receiving your COLA as a lump sum, you can elect to change to monthly payments. However, once you complete the election for monthly COLA payments, the decision is irrevocable. You cannot switch back to the annual lump sum option at a future date. So if you initially elect the monthly payment option for your COLA. You must continue to receive your COLA monthly for the rest of your retirement. For this reason alone, we recommend taking your time and being 100 % certain before filing Form 20, Election of Monthly Cost of Living Adjustment.

Major consideration number two is all about cash flow and you manage your money day to day. The monthly option is best for those who prefer predictability. It acts like a small steady increase to your regular benefit check, helping to offset the cumulative effects of inflation throughout the year. You won't notice a huge one-time jump in December, but your income will be consistently higher every single month. This is ideal for disciplined budgeting and for matching the flow of your regular monthly expenses. The lump sum is better for those who need a large annual cash injection for specific purpose, like paying annual property taxes, paying annual insurance premiums, or using the extra funds to cover Christmas gifts. If you don't trust yourself to save a little extra bit each month, the lump sum provides discipline by delivering the money all at once in December.

The third major factor to consider is the impact of payment frequency on tax withholding and adjusted gross income. The lump sum COLA is a single large payment which often results in a proportionately larger federal tax withholding than your regular monthly check. The withholding is initially based on the marital status and exemptions you have on file for your monthly benefit. If you choose the monthly COLA option, the tax withholding impact is spread out over 12 smaller payments. Your regular monthly benefit increases slightly and the proportional tax withholding on that benefit also increases slightly. This avoids the single large withholding event in December making the overall tax planning for your retirement income much smoother and more predictable.

The other tax consideration involves your annual adjusted gross income or AGI. While the monthly option spreads the tax impact smoothly, the lump sum option concentrates the entire year's COLA into December, which can artificially spike your AGI for that calendar year. This spike might push you over certain income thresholds, triggering unpleasant and unexpected tax consequences.

Two common AGI cliffs for retirees are, one, Social Security benefit taxation, a higher AGI can increase the percentage of your Social Security benefits that become federally taxable, and two, Medicare IRMA. IRMA stands for the Income Related Monthly Adjustment Amount. If your modified adjusted gross income, which is closely related to AGI, exceeds a certain threshold, your Medicare Part B and Part D premiums could also increase. In short, if you are close to one of these AGI tax cliffs, taking the COLA as a lump sum could inadvertently cause you to lose tax credits or pay thousands of dollars more in Medicare premiums. This is complex tax planning, so if this applies to you, you absolutely must consult a tax professional.

The choice between monthly and lump sum is a deeply personal financial decision. If you decide that the predictable, consistent cash flow of monthly payments is right for you, you'll need to complete PERS Form 20, Election of Monthly Cost of Living Adjustment. And in our next video, we will cover how to complete this form and an important deadline associated with the election. So make sure you subscribe to our channel so you don't miss that one.

If you found this video helpful, can thank me by liking the video and sharing it with other PERS members. If you have a follow-up question about COLA, PERS, or anything else related to personal finance that impacts PERS members, please visit our website at perspro.ms and submit your question for a future episode. Thank you for your valuable public service to the state of Mississippi. We'll see you next time.