Chapters

00:00 Introduction

00:32 Maximizing Benefits vs. Peace of Mind

01:21 Using Partial Lump Sum for Emergency Fund

02:15 Using Partial Lump Sum to Pay Down Debt

03:45 Using Partial Lump Sump for One Time Expenses

05:05 Using Partial Lump Sum with Poor Health

06:35 Using Partial Lump Sum as a Spending Bonus

07:27 Danger of Using Partial Lump Sum to Achieve Greater Returns

08:38 Cons of Taking a Partial Lump Sum Option

10:01 Action Items for Consideration

10:48 Preview of Next Video and Calls to Action

11:59 Disclaimer

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 looking at situations where a partial lump sum option may make sense, the math behind the decision, and why your choice usually boils down to a battle between maximizing benefits versus maximizing peace of mind. Let's get started.

If you haven't already, please go back and watch video number 45 where we provide a full overview of how the partial lump sum option works and video number 46 where we analyze the popularity of these options among 118,000 of your fellow retirees. When evaluating a partial lump sum option, retirees generally fall into one of two camps. Either maximizing benefits, these retirees use math to get the highest possible rate of return from the PERS system.

Or maximizing peace of mind. These retirees use cash to eliminate financial stressors, even if the math says otherwise. These two camps are often mutually exclusive. What makes you sleep better at night might technically cost you more over 30 years, and that's a trade-off only you can decide to make. 

One of the most practical uses for a partial lump sum option is establishing an emergency fund.

Transitioning to a fixed income can be jarring and having liquid cash is vital. But how much do you really need in your emergency fund? For a PERS retiree couple where both partners have a pension and social security, the traditional advice of six to 12 months of expenses can often be lowered to maximize benefits by taking a smaller PLSO.  Literature such as Spend Safely in Retirement Strategy published in 2017 suggests that when a household has a high income floor that is guaranteed income covering basic needs, they can safely maintain a smaller liquid cash reserve such as three months compared to those relying solely on volatile stock market withdrawals from IRAs, 401ks, or brokerage accounts, which may need 12 plus months.

Using a partial lump sum option to pay down debt and enter retirement debt-free can be a motivator for some PERS retirees.  However, the debt reduction strategy differs based on your goal. Maximizing benefits. You would only pay down debt with an interest rate higher than the cost of the partial lump sum option. Maximizing peace of mind. You pay off everything, including a 3 % mortgage, just to see that zero balance. So what is the cost of the partial lump sum option? Based on the 2025 PERS, ACFR, and the actuarial reduction factors, the break even interest rate is approximately 6-8%. 

If you have credit card debt at 22%, using a partial lump sum option to kill it is a massive mathematical win, but a rather small emotional win as the average balance is likely between $5- $8,000. 

If you have a 12 % personal loan, using a partial lump sum option to eliminate it is a small mathematical win and generally provides small peace of mind as the balances are on average between $8- $14,000.

If you have an 8 % auto loan with 3 years left that you are looking to pay off, using a partial lump sum option will neither be a mathematical win or loss, but it will provide a medium emotional win as the balances are a bit higher than credit cards and personal loans and average $27,000 to $40,000. 

If you are paying off a 3 % mortgage, you are technically losing future money on this transaction, but gaining tremendous peace of mind.

Sometimes a partial lump sum option is the only way to cover a major one-time expense. This is especially true if a retiree lacks other equity or debt avenues to cover the anticipated expense. Examples can include major medical expenses, being required to prepay for a procedure or specialized care not fully covered by the state health plan can cause a cash squeeze, relocating or downsizing, moving to be closer to family or downsizing to a more manageable home may involve costs not covered by mortgages or may be required to pay months in advance, such as if you rent simultaneously as you try to sell your home to live closer to a grandbaby. Likewise, if you are building a new smaller home simultaneously as you try to sell your existing home, you may not be able to get a construction loan to cover the entire cost of the new smaller home while paying the existing mortgage can become a cash squeeze. Major Home Repairs Replacing a 25-year-old roof on a home where you have low equity or can't get a favorable HELOC rate can cause a cash squeeze. In these cases, the Partial Lump Sum option prevents you from taking on high-interest predatory loans, or the Partial Lump Sum option may be the only avenue to pay these expenses, period.

Now let's look at how your health and life expectancy changed the math on the partial lump sum option decision. We've broken this down into three health statuses.  First, if a retiree is in poor health or facing a terminal illness, the 36-month partial lump sum option is almost always the mathematical winner that will maximize benefits. In this scenario, your priority is securing that cash immediately for yourself or your estate, rather than leaving it in the PERS system. 

For those in average health, you're in what we call the break-even zone. For most, it will take between 10 to 15 years of retirement, depending on your age at retirement for the larger monthly checks to catch up to the value of the lump sum you take on day one. You can calculate your specific nominal break even period or how many years of retirement it takes for the higher monthly check to overtake the lump sum by using the tables in appendix I of the PERS member handbook. 

Finally, if you have excellent health and a family history of longevity, not taking a partial lump sum option is usually the superior mathematical choice.  Over a 20 or 30 year retirement, that extra monthly income will significantly outpace the original lump sum option. 

Here is a table of select ages I've extracted to show the nominal breakeven point for a partial lump sum option at different ages at retirement. Keep in mind though that this table ignores the effects of the loss compounding COLA on the partial lump sum option and the real breakeven period would in fact be even higher.  

As we saw in video number 46, high earners, or those receiving over $5,000 per month, often have other assets like a 457B or 403B that they can use to support their retirement spending plan. If you are a high earner, as shown with retiree B in this table, your monthly bills are $4,000 and your PERS check is $5,000 per month, you have a monthly surplus. In this case, taking a partial lump sum option isn't about need. It can be viewed as taking a spendable bonus.

It's the go-go years fund for that dream 40th anniversary cruise or the kitchen renovation you've waited 30 years to do. Since you don't need the extra monthly income to survive, the upfront cash from the partial lump sum option can help cover that extra 10 % of spending retirees often incur the first two to five years post retirement.

Some retirees may want to take the partial lump sum option to roll it into an IRA thinking, I can invest this better than PERS or I don't know if PERS will be solvent over my entire retirement. Be careful. This is a massive transfer of risk. By taking the cash, you are taking the investment risk off PERS and putting it on your own shoulders. To quote unquote win this bet, be mindful of the following. Your portfolio doesn't just need to make money, it has to outperform the 7 % return PERS assumes for its own portfolio, plus cover the cost of the lost compounding COLA. By rolling over, you are moving from a pool risk environment to an individual risk environment where a bad market early in retirement could permanently deplete your funds. So not only do you need to overcome the 7 % in lost COLA, you also have to account for the additional risk you are taking on in your targeted risk adjusted rate of return.  On top of this, you may have to pay advisory fees and may incur fund expenses if not trading individual securities. The takeaway should be that a state-guaranteed, inflation-adjusted, professionally managed defined benefit benchmark to beat for the average retiree. And even if a retiree could achieve the risk-adjusted return net of fees required to make this mathematically beneficial, is it even worth the headache?

We've talked about the many situations where a partial lump sum option could make sense, but let's look at the cons of taking a partial lump sum option. Lower benefit. The monthly benefit reduction is for life, both for you and your beneficiary if you select a joint survivor annuity option. Lower COLA. Your 3 % COLA is calculated on your reduced monthly benefit amount if you take the partial lump sum option. Over 20 years, this loss can compound into tens of thousands of dollars.  Higher taxes. A large partial lump sum option taken as cash and not rolled over can push you into a much higher federal income tax bracket in the year of retirement. Plus, you could also be subject to a 10 % penalty if taken before age 55. Overspending risk. PERS only offers 12, 24, or 36 month partial lump sum options if you only need $15,000 to pay off a car loan but your 12 month partial lump sum option will net you $30,000, you might be tempted to spend the remaining $15,000 on things you didn't originally plan for in your retirement spending plan.

If you are still considering taking a partial lump sum option, here are your action items for today. One, evaluate your emergency fund. identify your cash available for an emergency fund and compare that to your needs. Taking a partial lump sum option could maximize peace of mind. Two, audit your debt. List your debts by interest rate. If you have rates above 10%, taking a partial lump sum option could maximize your benefits. Three, consult a professional.  Talk to a finance and or tax professional for personalized advice on selecting a partial lump sum option. 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 helps you understand the situations where a partial lump sum option could make sense. In our next video, we'll explore who should a PERS member or retiree designate as their beneficiary. Please make sure you subscribe so you don't miss this and other videos in our new retirement series. 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 plan for retirement, including deciding whether or not to take a partial lump sum option, 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.