The PLSO is designed for people who want money outside of the TRS pension.
In effect, TRS gives you some of your earned pension as a lump sum. In exchange you get less monthly benefit. But make no mistake: there are caveats and tradeoffs in this scenario.
OWLFA's note: The decisions here factor in the death of the person taking the pension. TRS takes into account how long they think the average TRS retiree will live when making the decisions on what level of pension to offer you. As financial advisers, our job is to present the information and help you make the best possible choices. We realize this can be an uncomfortable conversation and we're here to help you get through this with the best possible outcome. What we present below is simply a reflection of this reality.
Here are the potential outcomes of taking the PLSO:
If the pensioner dies within 10 years of retiring and receiving the reduced pension based on taking the PLSO, they will have received more money
If the pensioner dies after more than 10 years of retirement and taking PLSO, they will have received less money
What is the math behind this?
At the root is the time value of money equation. Your pension is based on you living to exactly your life expectancy. That’s the amount TRS pre-funds at your retirement. To put it bluntly, if you live longer, other member contributions cover your benefit. If you die earlier, you will have contributed more into the pension than you will take out.
When you elect the PLSO you are taking a big chunk of the money that was allotted to your pension, but you are taking it upfront. The downside is you can’t benefit from it as you get older unless you take the lump sum and invest it at a higher rate of return than 7.8%. It is important to understand that this scenario comes with considerable risk. Our example here is grossly oversimplified, but the financial arithmetic is solid on this.
We are not saying "don’t take the PLSO". There can be a million reasons to take the PLSO. You have a dream vacation, you want to give money to your kids, you want to pay off your house. But it is essential to understand the potential financial ramifications of the decision to take PLSO. We want you to make sure you are making the decision with open eyes. It's what OWLFA was founded for.