Chapters

00:00 Introduction and Overview of PERS Partial Lump Sum Option

00:44 Eligibility Requirements for PLSO

02:10 PLSO Consequences

02:40 PLSO Calculation Example

05:20 Tax Implications and Payment Methods for PLSO

05:59 Tax Withholding, Rollovers, and Penalties

07:02 Impact on Member Account and Re-employment Rules

07:59 Action Items: How to Decide on a PLSO

08:36 Final Advice and Next Steps for PERS Members

10:04 Conclusion and Resources for PERS Members

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, former school finance officer, current financial planner, and host of the PERS Pro YouTube channel. Today, we are diving into a choice that could put tens of thousands of dollars in your pocket on day one of retirement, the partial lump sum option. Let's get started.

The Partial Lump sum option allows you to receive a portion of your future retirement benefits as a single lump sum payment at the time of retirement in exchange for a permanently reduced monthly benefit. However, not everyone is eligible for the Partial Lump sum option. You must meet three requirements based on retirement type, PERS tier, and base option selected. 

First, you must be retiring under service retirement. Members retiring under disability retirement are ineligible for the PLSO.  

Second, PLSO eligibility is tied to your PERS retirement tier, which is determined by your original date of hire. Let's break down the requirements for each of these tiers. Tiers 1 and 2, those hired on or before June 30th, 2007, you are eligible for a PLSO if you have at least 28 years of credible service, or if you are at least age 63 with four years of service. Tier 3, those hired between July 1st, 2007, through June 30th, 2011. You are eligible for a PLSO if you have at least 28 years of credible service. And tier four, those hired after July 1st, 2011, You are eligible for a PLSO if you have at least 33 years of credible service. 

Even if you meet these tier specific milestones and service retirement requirements, the PLSO is only available to first-time retirees. Additionally, the PLSO can only be combined with six of the seven base service retirement options. You can combine the PLSO with maximum option, option two, option three, option four, option four A, and option four B. However, you cannot combine the PLSO with option one.

It is vital to understand the ripple effect of choosing a PLSO. The COLA Impact. Because your monthly benefit is lower, any future cost of living adjustments will also be smaller. Beneficiary Impact. If you select a joint survivor option, like options 2, 3, 4, or 4A, your beneficiary's future monthly benefit will also be lower for the rest of their lifetime.

The cost of your partial lump sum option is determined by an actuarial adjustment.  PERS uses a benefit adjustment table where your age at retirement determines the percentage of your monthly reduction. This table can be found in Appendix 1 on page 66 of the PERS member handbook. 

Two key concepts emerge here. The younger you are, the smaller the monthly reduction. This is because from an actuarial perspective, a younger person is expected to receive monthly checks for a longer period, so the cost of the lump sum is spread out over more years. Second, the larger the PLSO, the larger the monthly reduction. From an actuarial perspective, the larger the PLSO selected, the larger the cost of the lump sum. So, the more the monthly reduction has to be to recover that cost.

Let's look at a hypothetical example of how a partial lump sum is calculated and its impact on future monthly benefits. Imagine we have a retiree who is 57 years old with 30 years of service and a tier two PERS member. Their unreduced maximum retirement allowance is determined to be $2,500 per month. This retiree decides they want one year of cash upfront, so they select the 12-month partial lump sum option. Since their base monthly benefit amount is $2,500, PERS simply multiplies that by 12 months, resulting in a lump sum payment of $30,000. 

To account for that $30,000 payment, PERS has to reduce the ongoing monthly benefit amount. They use an actuarial adjustment factor from their benefit table. For a 57-year-old, that factor is currently 0.9334. To find the new monthly amount, we take that original $2,500 and multiply it by the factor of .9334. The result? A new reduced monthly maximum retirement allowance of $2,334. 

In short, the retiree gets a $30,000 check on day one, but their monthly PERS check will be $166 less every single month for the rest of their life. Had this retiree chosen another joint and survivor annuity option that is eligible for PLSO, the beneficiaries benefit would also have been reduced for their lifetime. Important reality check for viewers here. 

While the simple math shows a 15-year breakeven, the actual breakeven is typically much longer. Why? One, taxes. The $30,000 is a gross amount. After taking into account 20 % federal withholding, you may only net $24,000. Two, compounding COLA. Because the 3 % COLA is calculated based on your monthly check, a smaller check means a smaller COLA increase every single year.  Three, tax bracket, when you take a $30,000 partial lump sum option, it could potentially bump you into a higher tax bracket that year.

A partial lump sum option is typically paid as a single payment near the same time as your first monthly retirement check. You have two primary payment methods. One, direct payment. Partial lump sum option is paid directly to you by check or deposit. Two a rollover.  Partial lump sum option is rolled over into an eligible retirement plan like an IRA. 

Let's talk about taxes and partial lump sum options. Federal withholding.  Generally, if you take the PLSO as a direct payment, PERS is required to withhold 20 % for federal income tax purposes.  Taxable versus non-taxable. You can roll over the taxable portion to an Eligible Retirement Plan or IRA. If you have after-tax contributions or non-taxable, those can also be rolled over to an IRA or certain qualified plans as allowed by the IRS. early withdrawal penalty. If you are under age 55 or age 50 for certain first responders, the IRS may hit you with an additional 10 % tax penalty on any portion not rolled over. 

This is a critical crossroad for early retirees. If for example, you're retiring at age 54 with 30 years of service, that 10 % federal tax penalty applies to every pre-tax PLSO dollar you put in your pocket. By choosing a direct rollover, you avoid both the immediate 20 % federal withholding and the 10 % federal tax penalty, allowing your lump sum to continue growing tax-deferred.

As you can start to see, partial lump sum option is not free money. It is actually an advance on your own retirement account. In addition to the permanent reduction of monthly retirement benefits, the total amount of your PLSO distribution is deducted from your member account balance. This is your contributions plus interest. This is important because if you pass away before your monthly benefits have exhausted your contribution balance, your beneficiary receives the remainder but that remainder will be significantly smaller or even zero if you take a large PLSO. 

What if you take a PLSO, retire, and then decide you want to go back to work full-time for a PERS employer? Your new maximum retirement allowance will be reduced by the same dollar amount of the original PLSO reduction plus 1 % of that amount for every month you are re-employed. Essentially, you can't reset the clock to avoid the reduction you agreed to when you retired the first time.

If you are interested in the Partial Lump sum option, here are your action items for today. One, determine your eligibility. Make sure you meet the retirement type, tier, and option requirements.  Two, request an estimate of benefits. Request your estimate of benefits and review both the un-reduced maximum retirement allowance to determine the base for calculating your 12, 24, and 36-month Partial Lump sum option as well as your partial lump sum option estimates to identify your monthly benefit amount for the six base PERS options that can be combined with the partial lump sum option.  Three, consult a professional. Talk to a finance and or tax professional for personalized advice on selecting a PLSO, timing of a PLSO, direct versus rollover PLSO payment and tax implications of a PLSO.  In my experience, when PERS specifically mentions in their literature to consult a professional, it's an area you may want to think twice before trying to DIY it.

I hope this video provides you a better understanding of the partial lump sum option. In our next video, we'll explore should a PERS retiree select a partial lump sum option, where we will look at the pros and cons and situations where it could make sense. 

If you found this video helpful, can thank me by hitting the thumbs up button and sharing it with other PERS members. If you have a follow up question about PERS or anything else related to personal finance, please visit our website at PERSPro.ms, click YouTube and submit your question or topic for a future episode. 

And finally, if you're looking for a financial planner that specializes in helping PERS members in their 40s and 50s plan for retirement, please visit our website at perspro.ms to learn more about our firm and to schedule your initial consultation. Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

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.