TRS Guide Page 9 Roll Benefitsrdeluccio2017-10-02T14:15:12-05:00
I WANT TO ROLL MY BENEFITS OVER TO AN INVESTMENT ACCOUNT
You have the right to terminate your TRS benefit and receive a lump sum payment at any time after you vest and terminate your employment with a TRS institution.
Here is the deal.
If you are early in life - younger than 50 we don’t know the right decision without knowing more about you.
It is possible that rolling over your benefit to another investment account will lead to a more secure retirement for you and your family.
Before 50, you probably have ~20 years before you have to start touching the money.
TRS credits accounts like this. Before you turn on the pension, you make 2% per year, from the moment you elect to receive the pension. It is as if your money earns 7.8%/ year.*
(wonky explainer: The Pension credits your account with 7.8% return/year in order to make your payments. It’s so they can keep the retirement payments smooth)
You may say that makes no sense. Well it is a quirk of how we account for pensions under the U.S. Tax Codes.
Now knowing this accounting trick, and seeing 20 years before you have to retire, you may think: I’m going to go for the brass ring I’m going to invest my own money and earn way more.
You may be right. But once you roll the money out you run the risk of running out of money.
Is that the right decision? For everyone there is a different answer to that question, so we don’t know. It is the kind of problem we like to work through with clients.
What about over 50?
Now the decision tilts toward holding the pension. Why? Well:
We have a really good name for the problem. It is called “Sequence Risk.” Sequence risk is the risk of facing bad investment outcomes early in your retirement. This is what most people are afraid of when it comes to investing their retirement savings.
Let’ look at this example:
Path One: Bad years early
Path Two: Bad years later
Which one would you rather have leading up to retirement?
Well hypothetically it doesn’t matter because they both end up in the same place.
Now let’s add in the requirement that the portfolio account produce some income beginning after year ten. Now sequence risk is a big deal.
Under this scenario, you see how the sequence of returns determines most of the outcome.
Bottom line: Cashing in your TRS account and surrendering the pension after age 50 can be a financially dangerous decision.