Hello, and welcome to the CSRS Plan 2 and CSRS Plan 3 Transfer Education Program video.
This video, along with the other transfer education tools, is being provided to you
by the Department of Retirement Systems in order to provide you with information and
tools to help you with your transfer decision.
You've already been mailed a newsletter with a checklist of steps to be taken before you
make your decision to stay in CSRS Plan 2 or transfer to CSRS Plan 3.
By now, you should have set up your transfer education information file, indicated in Step
1 of the checklist.
This file is to hold the correspondence you'll be receiving, such as your transfer information
letter.
Follow the remaining steps in the checklist, repeating them as needed until you're comfortable
making your decision.
This video and booklet, plus transfer decision workshops and a toll-free helpline, will provide
you with tools, important tools, to help you make your decision to either stay in CSRS
Plan 2 or to transfer to CSRS Plan 3.
In addition to the tools already mentioned, you have access to computer software to help
you model various retirement scenarios and compare how each plan might perform for you.
After you've used the software, go to the booklet and work through the worksheets on
page 42.
These will help you to determine how much income you'll require during retirement and
how much additional, if any, you'll need to save between now and your retirement.
On September 1, 2000, all eligible classified employees of school districts and educational
service districts who are members of Public Employees Retirement System, PERS Plan 2,
will become members of the School Employees Retirement System, CSRS Plan 2.
Becoming a member of CSRS Plan 2 will not affect your current benefits in any way.
However, as a CSRS Plan 2 member, you have the opportunity to decide to remain in CSRS
Plan 2 or transfer to CSRS Plan 3.
This decision is an important one, but no one can tell you what to do.
You have to make the decision yourself.
This is important because each CSRS member has a different situation.
Your decision is individual and unique.
Using the tools and information provided, you can make the decision that's best for
you.
You may want to seek professional advice if you have concerns in technical areas, such
as taxation.
As a CSRS Plan 2 member, you have the option to stay in Plan 2 or to transfer to CSRS Plan
3.
If you choose to, you may transfer the contributions you've made to PERS Plan 2, plus the interest
you've earned on those contributions, at any time during a six-month window, starting
September 1, 2000 and ending February 28, 2001.
Members who transfer by February 28, 2001 and who earn service credit in January 2001
will receive a transfer payment currently equal to 65 percent of their January 1, 2000
account balance.
The 2000 Legislature, in session as this video is being made, is considering legislation
that would increase the transfer payment.
For current transfer payment information, refer to the DRS website.
Now let's discuss defined benefit and defined contribution plans and how they relate to
CSRS Plan 2 and CSRS Plan 3, and then we'll go over scenarios of three different hypothetical
CSRS employees.
A defined benefit plan is a pension plan where the benefit is determined by a formula and
is guaranteed for your life or your life and the life of your beneficiary, while a defined
contribution plan is like an investment account.
You add money into the account, invest it, and eventually get the balance.
This balance provides your retirement income.
CSRS Plan 2 is a defined benefit plan.
In CSRS Plan 2, you contribute a percentage of your pay into the plan, and your employer
also contributes toward the cost of the plan.
You're eligible to retire at age 65 with five years of service or as early as age 55 with
a reduced benefit if you have at least 20 years of service.
CSRS Plan 2 provides a benefit of 2 percent of your average final compensation times your
years of service.
The benefit you receive is guaranteed for your life or your life and the life of your
beneficiary.
After you've been retired for one year, your benefit will increase every July 1st with
a cost of living adjustment based on the consumer price index of Seattle up to a maximum of
3 percent.
CSRS Plan 3, the new plan, is made up of both a defined benefit plan and a defined contribution
plan.
The defined benefit portion of CSRS Plan 3 is funded by your employer, while the defined
contribution portion is funded by you through your continuing contributions, plus your account
balance at the time you transfer and a transfer payment currently equal to 65 percent of your
January 1st, 2000 account balance.
You also receive credit for investment gains and losses in the defined contribution portion.
In the defined contribution component, there is no specific retirement age.
This means that if you leave your covered employment, you can either leave your funds
invested in Plan 3 or take your account with you.
If you withdraw your account, you are still eligible to draw your defined benefit once
you meet the age and service criteria.
Your defined benefit is payable at age 65 with 5 years of service credit if certain
criteria are met.
Otherwise, 10 years of service credit are required.
You can receive a benefit as early as age 55 with 10 years of service credit, but that
benefit will be reduced.
In addition to your contribution and the transfer payment, there is a gain sharing component
of CSRS Plan 3.
Gain sharing payments are made to CSRS Plan 3 members' accounts in January of even-numbered
years, if the earnings from the CSRS Plan 2-Plan 3 combined trust fund average more
than 10 percent over a four-year period.
Half of the amount over 10 percent is passed on to CSRS Plan 3 members' defined contribution
accounts based on the number of each member's years of service credit.
CSRS Plan 2 members who transfer to Plan 3 may receive retroactive gain sharing payments
for 1998 and 2000 in March 2001.
Eligibility criteria for the retroactive gain sharing payment are detailed on page 17 of
your booklet.
You will receive a transfer information letter in April 2000 that will give you an estimate
of your potential retroactive gain sharing payment.
The defined benefit portion of CSRS Plan 3 gives you a guarantee of 1 percent of average
final compensation times years of service credit, which represents half of what you
would have gotten under CSRS Plan 2.
The cost of living adjustment, or COLA, is the same as CSRS Plan 2.
If you're in CSRS Plan 3 and you quit working with more than 20 years of service credit
and delay drawing the defined benefit, your pension increases by one-quarter percent per
month until you begin receiving the benefit.
Under CSRS Plan 2 and CSRS Plan 3 defined benefit, you can choose to take your pension
for your life only, or over a period of time that includes a beneficiary's life as well
as yours.
You have four benefit payment options to select from when you retire.
Option 1, the standard option, provides the largest benefit, but provides it for your
life only.
If you select one of the three remaining options, your monthly benefit will be reduced, but
your beneficiary will receive a percentage of your benefit after your death for as long
as he or she lives.
The amount of your reduction is based on the option you select and the difference between
your age and your survivor's.
Remember that defined benefit plans are guarantees.
You and if you elect your survivor get a guaranteed benefit.
Now let's turn from the defined benefit part that is present in both CSRS Plan 2 and CSRS
Plan 3 and talk about the defined contribution part that is offered only in CSRS Plan 3.
The defined contribution portion of CSRS Plan 3 lets you accumulate a lump sum of money
through your contributions.
You can choose from six contribution rate options.
These options allow you to contribute from 5 to 15 percent of your pay.
The important thing to remember in choosing a contribution rate option is that you can't
change it unless you change employers.
So make sure the rate option you've chosen won't cause problems with your day-to-day
living expenses.
CSRS Plan 3 defined contribution has two investment programs.
The Washington State Investment Board or WSIB investment program, which invests your CSRS
Plan 3 defined contribution money basically the same way the defined benefit money is
invested, and the self-directed investment program.
The self-directed program allows you to select among six investment funds, plus three self-balancing
funds with set asset allocations.
The self-balancing portfolios ensure that your money will remain invested according
to the investment strategy of the fund that you choose.
The blend of investments will remain consistent with your investment objectives, regardless
of changing markets or any fluctuations in the value of your account.
Now back to our original question.
Which plan is better for you, CSRS Plan 2 or CSRS Plan 3?
One way we can look at these plans is to see how much CSRS Plan 2 will pay under assumptions
about your age, inflation, and retirement, and compare that to the two parts payable
under the CSRS Plan 3, the monthly benefit under the defined benefit portion, and the
equivalent of a benefit for some period of time from the defined contribution portion.
Notice that the defined contribution is a sum of money representing your contributions,
the transfer payment, gain sharing payments, and all of the investment gains and losses.
This sum can be made payable in a lump sum, a series of payments, or a combination of
payments.
You can receive a lump sum or monthly payments from either the WSIB investment program or
the self-directed investment program.
However, in order to receive your account balance in a series of payments based on your
life expectancy, such as an annuity, your funds must be in the self-directed investment
program at the time you begin your withdrawals.
If you're in the WSIB investment program and want that type of withdrawal, you can
transfer your balance to the self-directed investment program and request withdrawals.
DRS has contracted with ICMA Retirement Corporation to maintain records of individual member accounts.
In addition, they offer personal consultations on distribution options on a toll-free phone
line.
You'll find information on them on Roman numeral page 6 of your workbook.
When you decide to begin your withdrawals, you may want to contact them regarding which
withdrawal method is appropriate for you.
You should be aware that these distributions are subject to federal taxation and a possible
penalty tax depending upon your age.
Be sure to consult with your tax advisor regarding the tax treatment of your withdrawals.
The standard method of calculating the monthly withdrawal is by using certain assumptions
about life expectancy, rates of return, and inflation.
Since CSRS Plan 2 provides a lifetime benefit, this video and the software show CSRS Plan
3 payments paid over the person's life expectancy.
By doing this, we provide a good comparison of the two plans.
We input the assumptions into the modeling software that we've developed for this purpose.
And once we've done the calculation, we can estimate how much monthly income the defined
contribution will generate.
This amount added to the defined benefit of Plan 3 can then be compared to CSRS Plan 2.
Two other methods illustrated in the software are specific rate and return only.
With specific rate, you withdraw a set percentage of your account, such as 7%.
If your account earns 8% and you withdraw 7%, your account provides income for you and
still continues to grow.
The return only method is when you withdraw only what your investments have earned for
the year.
If they earn 8% and you withdraw 8%, you have income, but you haven't used any of
your principal.
In order to calculate the estimates comparing CSRS Plan 2 and CSRS Plan 3, you must make
assumptions about rates of return and inflation.
Let's start with the investment rate of return we assume for our defined contribution plan.
The rate of return is the amount your investment increases over a period of time expressed
as a percentage.
Even a small difference in this return can make a big difference in the ending balance
of your account.
Our assumptions are based on historical rates of returns for various investments and inflation.
Over the long term, inflation has averaged 3.01%, bonds 5.12%, large company stocks 11.35%,
and small company stocks 12.63%, and cash equivalents of 3.78%.
Over 25 years, the consistent difference between a rate of return of 4% and 9% can roughly
double your money.
As an example, if you invest $1,000 per year at 4% for 25 years, your account will grow
to approximately $41,646.
At 9%, your account would be worth $84,701.
Smaller differences in rate of return will also make differences that you can see over
time.
A 1% difference in rate of return between 8% and 9% can lead to over a 15% difference
in your balance in that same 25-year period.
Another thing that makes a difference is the rate of wage increases.
CSRS Plan 2 and the defined benefit portion of CSRS Plan 3 both use average final compensation,
or AFC, as part of your pension calculation.
The software lets you input an assumed rate of wage increase.
This affects your estimate because if your wages increase through the years, your pension
will be higher.
Inflation or the cost of living is the cost of goods and services continuing to increase
over a period of time.
The greater the rate of inflation, the more it may cost you to maintain your current lifestyle.
If it costs you $1,500 per month in today's dollars for your living expenses, and inflation
is 2% per year, next year it will cost you $1,530 to cover your costs.
At 4%, the amount you'll need goes to $1,560, and at 6%, it would be $1,590.
If inflation remained at 3% per year for 25 years, your $1,500 cost would more than double
to $3,140.
The same would be true with your wages.
If they increase at 3% per year, they would double in that same time period.
Inflation also affects the defined benefit payment in both plans because that benefit
is adjusted annually according to the Consumer Price Index in Seattle, up to a maximum 3%
per year.
Within CSRS Plan 3, your contributions are a percentage of your salary and consequently
track along with any wage increases.
Your payments from the defined contribution account, when you take them, can also be made
to increase over time.
To keep our comparison straight, we calculated payments from the defined contribution account
to have the same rate of increase as the defined benefit payments.
How does this affect your decision to stay in CSRS Plan 2 or to transfer to CSRS Plan
3?
You should keep in mind that you'll be seeing and hearing dollar figures that have to do
with money in the future.
Those figures may seem large, but that's because they're inflated future dollars.
They won't buy as much as present dollars.
What matters is not the absolute amount, but the comparison between income benefits under
CSRS Plan 2 and under CSRS Plan 3 at the same point in the future.
When we compare dollar figures between the plans, we make sure that we've applied the
same assumptions about inflation to all calculations.
There are more considerations in the CSRS Plan 2 to CSRS Plan 3 transfer decision.
One important factor is early retirement.
CSRS Plan 2 defined benefit allows for early retirement at age 55 with 20 years of service,
while CSRS Plan 3 defined benefit allows for early retirement at age 55 with 10 years of
service and no specific age for the defined contribution portion.
If you think you might retire early, this can be an important consideration.
Keep in mind that retiring early reduces your defined benefit under both CSRS Plan 2 and
CSRS Plan 3.
In addition, if you stop working at an early age, your contributions to the defined contribution
portion of CSRS Plan 3 will stop as well.
This results in a smaller account balance from which to draw your additional retirement
income.
Another issue is survivability.
Think of the defined contribution portion of CSRS Plan 3 like a knapsack of money.
When you die, before or after your retirement, your designated beneficiary gets the money.
If the designated beneficiary dies, the balance goes to that person's beneficiary.
In other words, the defined contribution portion is survivable.
With the defined benefit pension, both under CSRS Plan 2 and CSRS Plan 3, retirement benefit
payments can only be made to you or to you and your one designated survivor.
After both of you have died, the benefit stops.
Survivability is limited to that one person.
If you die before retirement, other rules apply.
But basically, your employee contributions are payable to your beneficiaries, and if
you have a spouse or minor children, they can choose a monthly benefit instead.
Another issue for consideration is flexibility of payment.
CSRS Plan 2 benefits and the defined benefit portion of CSRS Plan 3 are fixed in their
payment and amount.
You get X dollars per month and a COLA increase each July 1st after you've been retired for
a full year.
If you die before your beneficiary, your beneficiary will get the amount determined by the survivor
option you chose.
You don't have any control over the amount of the benefit.
On the other hand, the defined contribution allows you to tailor within limits the amount
you withdraw.
For example, suppose you retire from Washington and take a job elsewhere.
You may want to leave your defined contribution balance invested in CSRS Plan 3 so it can
continue to grow.
Suppose later you want to take more from age 60 to 62 to live on until you or your spouse
collects Social Security.
You might take more until 62, then reduce the withdrawal from age 62 to age 70 and a
half.
As mentioned before, you need to know that defined contribution plans have their own
special tax rules which need to be followed or significant penalties could apply.
All in all, there are a lot of decisions to make and a lot of considerations in choosing
which plan is best for you.
If you think the income from CSRS Plan 3 meets your needs better than CSRS Plan 2, you transfer
to Plan 3.
But if you determine that CSRS Plan 2 is better for you, you do nothing and stay with CSRS
Plan 2.
It's your choice.
Now we should look at some different folks who are faced with the same decision you are.
Hi my name is Sharon.
I was wondering if I could talk with someone about which of the CSRS Plans is right for
me?
Yes, of course.
I'd be happy to help you.
But before we begin, I need to get some basic information from you.
What do you need?
Well, I need to know your birth date, your current wage, the month you want to stop working
and how old you'll be when you stop.
And then there are a few pieces of information on your transfer information letter that I'll
need as well.
Oh, that's easy.
My birth date is May 1st, 1970.
I earn about $18,000 a year.
And the month I want to stop working, I guess I'd work through the school year.
That would make it August.
And I'd like to stop working in August of the year I'm 55 years old.
Now what do you need for my transfer information letter?
We'll need to know your years of service as of August 31st, 1999, the amount of any estimated
gain sharing payment, and your account balance as of January 1st, 2000.
Okay, let's see.
I had four years as of August 31st, 1999.
I have an estimated gain sharing amount of $1,286.
And my account balance was $3,100 on the 1st of January, 2000.
Is that all you need?
Yes.
That's it.
Now, in order to help you make this decision, we'll have to do some calculations to come
up with an estimate that we can compare.
Okay, I'm ready.
As you know, there are two different plans from which you can choose.
One is CSRS Plan 2, a defined benefit plan, and the other is CSRS Plan 3, which has both
a defined benefit part and a defined contribution part.
Can you tell me what my benefit under CSRS Plan 2 will be when I want to stop working?
We can come up with a pretty good estimate, but I think we should figure your benefit
for both age 55 and age 65.
Why age 65?
I want to retire at 55.
Because 65 is considered normal retirement age, if you retire before 65, an early retirement
reduction has to be applied to the age 65 benefit.
That's true of the defined benefit part in both Plan 2 and Plan 3.
Wait a minute.
That sounds like I'll get less at 55 than 65.
Why?
Because the defined benefit will pay you for as long as you live, and if you begin receiving
it at age 55 instead of 65, the amount is reduced because you're starting 10 years
earlier.
Let's put your information into the computer and see what your benefit will be at age 65
first, and then at age 55 with a reduction.
Okay.
I'm anxious to see what the difference will be.
Based on your average final compensation and dual-
Wait a minute.
I'm sorry.
I've forgotten what average final compensation is.
Can you explain it?
Of course.
Average final compensation is the average of your 60 consecutive highest paid service
credit months.
The Transfer Decision Modeling software that I'm using estimates what that will be based
upon your current salary, projected salary increases, and your estimated years of service.
Yes.
I remember now.
Okay.
Then, based on your average final compensation and your years of service when you stop working,
your monthly benefit at age 65 will be $1,778.
Then, we apply the early reduction factor for age 55 in three months, and we get your
age 55 benefit of $640.
Wow.
Waiting until age 65 will give me that much more than if I retire at 55?
Yes.
It's a difference of almost $1,140.
If you quit working at age 55 and begin receiving your pension, it'll be $640, but if you wait
10 years to begin receiving it, it'll be $1,778.
Do you understand that when we're talking about the difference between age 55 and age
65, that it doesn't mean you have to work until you turn 65?
No.
I don't know what you mean.
I thought that if I wanted to get my pension at 65, that I had to work to that age.
A lot of people are confused in this area.
Let me explain three important dates that can affect your retirement income.
The first is your separation date.
This is when you separate from service with all eligible employers.
It can be any date.
Your retirement date is the date you wish to begin receiving your pension from either
CSRS Plan 2 or CSRS Plan 3 defined benefit, and it can't be prior to age 55.
And your withdrawal date is the date you wish to begin withdrawals from the defined contribution
portion of the CSRS Plan 3.
Your withdrawal date can be any date on or after your separation date, but no later than
age 70 and a half to conform to IRS regulations.
These could be three different dates, or, depending on your age of separation, they
could be the same.
So when I talk about the different amounts at age 55 and 65 for CSRS Plan 2, it doesn't
mean that you separate from service at age 65.
It means 65 is your retirement age, and that's when you decide to start taking your benefits.
What do I do for income between age 55 when I leave work and 65 when I start getting my
benefit?
Some people have other savings or investments to tide them over, or a lot of people go to
work somewhere else.
I see.
Let's find out what your monthly income would be for CSRS Plan 3 at age 55 and age 65.
Sounds good.
I've put all your information into the computer, and it looks like your CSRS Plan 3 defined
benefit at age 55 will be $320 per month, or $3,838 annually.
Isn't that half of what the calculation was for CSRS Plan 2?
That doesn't seem like very much.
That's right.
It is exactly one half of CSRS Plan 2.
But remember how with CSRS Plan 2, you'd get a larger amount if you waited until age 65
to begin receiving your benefit?
Well that's true with CSRS Plan 3 as well.
But CSRS Plan 3 gives you something else if you have at least 20 years of service when
you stop working.
If you delay receiving your benefit, you'll get an increase of about 3% for each year
between your separation age and retirement age.
So if you separate at age 55 but wait until age 65 to start your benefit, your annual
pension will be $14,286, or $1,190 per month.
And remember, we still have to add the defined contribution portion.
That's right.
Okay, let's do that.
Alright.
But there's one more thing.
During the years you're still working, you have to contribute a percentage of your paycheck
to your defined contribution account.
There are six options to choose from that range from as little as 5% of your pay up
to as much as 15%.
They've all been listed for you in the materials you've received.
It's on page 19 of your booklet.
Something important to remember is that once you've selected an option, it's irrevocable.
You can't change it unless you change employers.
Oh, so I better be sure I can afford whatever I select, right?
Yes.
You have to make your selection based on your personal living expenses and what you think
you can afford to save.
Well, I noticed that option C would let me contribute 6% until I'm 35 years old, and
then 7.5% until I'm 44 and 8.5% for the rest of the time I work.
I like that because I think I'll probably get some pay raises through the years, and
that option allows me to increase my contributions as my income goes up.
I would tend to use that option.
That's good thinking, Sharon.
It's always a good idea to attempt to save any pay raises, but remember, your expenses
will probably be going up through the years as well.
I know.
You're right about that, especially since I'm a single mother.
I'll probably have to spend more on my son once he's in high school, but I want to force
myself to put away as much as possible.
For right now, let's calculate how it would look with option C.
All right.
Now, you have to decide how your money should be invested.
You'll have a selection of investments in the self-directed portfolio to choose from,
such as a money market account, stock funds, and so on.
Of course, you can elect to have the state invest your money for you in the same way
that they invest other pension money by selecting the Washington State Investment Board's total
allocation portfolio.
This may be a good option if you're not comfortable making investment decisions and you have a
long investment horizon.
You mean I get to control what happens to my money?
Well, yes and no.
You can choose how your money is invested, but how much it earns while it's invested
depends on how the investment you've chosen perform.
I like this.
I like the idea of having more control over my future retirement dollars.
So I choose the investments for my account, and then it grows through the years based
on the rates of returns the investments get.
And what's there when I retire is what I use to supplement the defined benefit portion
of CSRS Plan 3.
That's right.
But I don't know much about investments.
How am I going to know what to choose?
To help make your investment selections, you should try to attend one of the workshops
that are going to be offered by ICMA Retirement Corporation throughout the state starting
in September.
These workshops are designed to provide investment education.
In other words, to give you information to help you select investments for your account.
The contact information for that company is listed on Roman numeral page 6 of your workbook.
You can contact them to find out dates and times for investment education workshops.
Oh, good.
I'm glad to hear that.
I'll be sure to go to one of those workshops.
What else do I need to know?
Well, there's one more thing.
You have to make an assumption about what rate of return you'll get on your investments.
No one knows for sure what you'll get, but let's assume 8%.
Now, we can do some calculations to determine what you might have in your account on the
day you stop working and on the day you want to begin taking withdrawals from your account.
Remember, you can use different assumptions in the modeling software.
Based on your January 1st, 2000 account balance, transfer payment, and contributions, and assuming
an 8% rate of return, your defined contribution balance would be worth approximately $188,235
at your age 55.
Wow.
That sounds like a lot of money, but when can I take it out?
Well, you can begin withdrawing this money at any age up to 70 and a half after you separate
from employment.
At age 70 and a half, the IRS requires you to begin withdrawals.
You can input when you want to begin withdrawals in the modeling software.
Then, in order to compare Plan 2 and Plan 3 as fairly as possible, the software assumes
you withdraw your account balance over your life expectancy.
It's important to note that if you really want to structure your payments this way,
you have to be in the self-directed investment option at the time you start the withdrawal.
If you're under age 59 and a half when you begin your withdrawals based on your life
expectancy, you must continue the withdrawals for the longer of five years or until you
reach age 59 and a half.
Based on this method, your estimated withdrawal at age 55 would be $997 per month.
If you wait until age 65 to begin withdrawals, your account will grow to approximately $409,568.
At that age, you could withdraw any amount.
However, if we based the withdrawal on your life expectancy, it would be about $2,622.
Wait a second.
That's monthly?
Your monthly payment at age 55 would be about $997 and at age 65, it would be about $2,622.
Wow.
I wasn't expecting that.
I know.
That sounds like a lot, but remember, those are future dollars.
If inflation is 3% per year for the next 35 years when you'll be 65, $2,622 at that time
will buy what $932 buys today.
That's interesting, but let's go ahead with the rest of my calculations.
Okay.
Let's figure out what your total CSRS Plan 3 monthly income would be if you started taking
payments at age 55.
Sounds good.
If we add your defined benefit of $320 to the defined contribution amount of about $997,
your total estimated monthly income at age 55 would be $1,317.
If you wait until age 65 to begin receiving your retirement income, the total monthly
amount would be about $3,813.
Something else to keep in mind is that you could start your defined contribution withdrawals
of $997 at age 55 and wait until age 65 to start the defined benefit of $1,190, or you
can do it the other way around.
You could start the defined benefits of $320 at age 55 and start the $2,622 defined contribution
at the age 65.
CSRS Plan 3 has a lot of flexibility.
Wow.
I didn't know that before.
But now back to my original question.
Which plan is best for me?
If you're comparing by ages, it looks like CSRS Plan 3 is consistently higher given your
assumptions about age, salary, and investment return.
But there's something else you need to understand too.
Expendables from your defined contribution account were figured based on your life expectancy,
the projected rate of return on your investments and inflation.
So assuming the rate of return and inflation never changed, at the end of 29 years, your
estimated life expectancy at age 55, your account would be at zero.
If that happens, you would still have the defined benefit portion of your pension.
And by that time, the $320 per month will have increased to about $732, assuming that
the cost of living adjustment was the maximum 3% each year.
Ugh.
That sounds like something to avoid.
Well, yes.
But another way to look at this is to compare just the defined benefits and then to determine
how much you would need to withdraw from the defined contribution to make both pensions
the same.
Ugh.
Now you're really confusing me.
What do you mean?
Well, at age 55, your CSRS Plan 2 defined benefit would be $640 per month, while the
CSRS Plan 3 defined benefit would only be half that amount, or $320.
We determined what your defined contribution withdrawal would be based on your life expectancy,
and we know that these payments will stop once your account balance is zero.
But we also know that under this method, you can change the monthly amount after you meet
the required time period.
So if you start your withdrawals at age 55, at age 60, you can change the amount.
Let's compare what your retirement income might be at that time.
Your defined benefit pension under either CSRS Plan 2 or CSRS Plan 3 will increase each
year based on the cost of living adjustment.
If we assume that that will be 3%, at age 60, CSRS Plan 2 will be $742, and CSRS Plan
3 will be $371.
In order to make the income from the two plans equal at age 60, you can reduce your monthly
withdrawal from the defined contribution to $371 and take out an additional 3% each year.
That way, you would always have as much as CSRS Plan 2.
In your case, you could clearly match the CSRS Plan 2 defined benefit with the combined
income from CSRS Plan 3.
Now, most of us don't want to reduce our income, but I think it's important for you to see
how much control you have over it.
If your investments earned 8%, for example, and at age 60, you began to withdraw 7% of
your account balance, you'd never run out of money.
So once again, there's a lot of flexibility in CSRS Plan 3.
Boy, I like this.
If I were to go with CSRS Plan 3, I'm not sure whether I would want to start receiving
my pension at 55 or 65.
Do I have to make that decision when I choose my plan?
No.
You can decide the age you want to start receiving your pension when the time comes.
Good.
I've got 30 years to decide.
Oh, I just thought of something else.
Who can I put down as a beneficiary?
You can name anyone as a beneficiary.
Well, I'm divorced, and I was thinking that I would name my son as a beneficiary.
I want to leave him with something in case I die while he's still a minor.
If you die before you retire, both plans will provide a benefit to your surviving spouse
or, if you're not married, to the guardian of your minor child.
The amount your survivor receives and how it is calculated depends on whether you're
in CSRS Plan 2 or CSRS Plan 3, but at least you know your son would get something.
When you retire, both CSRS Plan 2 and CSRS Plan 3 also allow you to name anyone as a
beneficiary.
However, if you select a survivor option when you retire and name your child as your beneficiary,
your defined benefit pension will be reduced by a significant amount because the reduction
is based on the difference in your ages.
This is something to keep in mind even though you don't make the decision to name your son
as a survivor on your pension until the time you actually apply for retirement.
Oh, I didn't know that.
That makes me feel a little better.
Good.
Now, do you have any other questions regarding your decision to either stay in CSRS Plan
2 or transfer to CSRS Plan 3?
I don't have to decide today, and I can call this number again if I have any questions,
right?
Yes, that's right.
Okay, good.
I'll call you if I have any questions after I attend one of those transfer education workshops.
Thanks again for all your help.
Oh, you're welcome.
Good evening.
How can I help you?
Hello.
My name is Mary, and I have some questions about the pension plan decision I have to
make, and I was hoping you could answer them for me.
I have to make a choice between the CSRS Plan 2 and the CSRS Plan 3, and I'm just not really
clear on which one would suit me better.
All right.
Let's see if I can help you sort things out.
Tell me a little bit about yourself.
What's your birth date, annual wages, what month do you want to stop working, and how
old will you be at that time?
My birth date is 8-23-54, and I make about 19,000 a year.
I think I'd like to stop working in August of the year that I turn 50, and that'll be
in 2004, and if I could start collecting my retirement when I'm 55.
My husband will be retiring the same year, and we plan on traveling around a bit.
Do you need anything else?
Yes, I do.
I need to know your years of service as of August 31, 1999, and the amount of your account
balance as of January 1, 2000.
Also, the amount of any estimated gain sharing payment.
That information should be on your transfer information letter.
Oh, yes.
Here it is.
Let's see, years of service are 10 years, and my account balance was 8,340, with estimated
gain sharing payment 3,617.
Is this enough information for you to help me make this decision?
Almost.
I'll need an estimate of what your average final compensation will be when you stop working,
but our computer software will calculate that for us.
But before we go any further, do you understand the difference between a defined benefit plan
and a defined contribution plan?
Actually I do.
My husband has a defined benefit and a defined contribution plan, and we've talked about
it quite a lot.
Great.
Then let's take a look at your estimated benefits and start making some comparisons.
First, I need to point out to you that when you stop working at age 50, you'll only have
15 years of service credit.
That means that you can't begin collecting a benefit under CSRS Plan 2 until you're age
65.
In order to take an early retirement under CSRS Plan 2, you need to have at least 20
years of service credit when you separate from service.
However, in order to collect a benefit at age 65, you only need to have 5 years.
Oh, I didn't know I had to have 20 years to be eligible to receive my benefits early under
CSRS Plan 2.
But I don't think it would be a problem if I have to wait until 65.
My husband will be getting a good pension early.
But if I want to start my benefit at age 55 under CSRS Plan 3, can I do that?
Yes, you can.
But there'll be a reduction in the amount because you're retiring early.
I'll calculate your monthly pension at both ages 55 and 65 so you can see the difference.
All right.
But first, I'm going to calculate what your age 65 benefit would be under CSRS Plan 2
so that you can compare it to the CSRS Plan 3 at age 65.
Good.
Based on our input of the information you gave me, your age 65 CSRS Plan 2 defined benefit
would be $6,052 annually or $504 monthly.
And because you won't have 20 years of service, you won't be able to draw your Plan 2 benefit
before age 65.
So at age 55, I don't get anything from CSRS Plan 2.
And at age 65, I'll get $504 per month.
Okay.
What about CSRS Plan 3?
Well, before we can calculate your total CSRS Plan 3 retirement income, you'll have to select
a contribution option.
This is how much of your pay you intend to contribute to your defined contribution account.
You have six options to choose from with varying rates of contribution percentages.
Oh, yes.
I remember seeing those in the information I received.
I was thinking of contributing at 15% of my pay.
I don't know.
Do you think that's too much?
Well, it all depends.
15% is a significant amount of your pay.
There are some things you should keep in mind before making your final decision.
Look closely at your household budget.
Will a 15% reduction in the amount of money you have to spend cause trouble down the road?
Putting 15% of your pay into your retirement is a good thing, but only if you can afford
to do so without causing financial trouble for yourself.
My income and benefits are important to us, but we can afford to save a substantial part
of it.
The other thing you need to keep in mind is that once you choose one of these options,
you can't change your mind unless you go to work for a different employer.
Your decision is irrevocable.
Oh, I had forgotten about that part.
Okay, then, for this projection, let's put 10% into my Plan 3.
I mean, there's really no point in painting myself into a corner.
All right, then.
Your contributions under option E, 10% of pay, will be invested based on the choices
you make from the two investment programs being offered.
Once invested, these contributions, your account balance and transfer payment, will earn the
rate of return your investments achieve.
The Department of Retirement Systems has enlisted the services of ICMA Retirement Corporation
to provide investment education services.
They will be running workshops at schools throughout the state on an ongoing basis.
If you're interested in learning more about SIRS Plan 3 investments, be sure to watch
for an opportunity to attend one of these sessions.
You can call the toll-free number listed on Roman numeral page 6 of your booklet to find
a session in your area.
However, for the purposes of this exercise, let's assume an 8% return on your investments.
Is that all right with you?
Mm-hmm.
It is, although I'm planning on attending one of the workshops.
This is another thing my husband and I have discussed, and we're comfortable assuming
that we can achieve an 8% rate of return on our investments over time.
Okay, let's find out what the difference will be between retiring at age 65 or 55 under
SIRS Plan 3.
Then we can compare the two plans.
Sounds good.
Okay.
Let's see.
The SIRS Plan 3 defined benefit at your age 55 would be $1,062 per year or $88 per month.
Or if you wait until age 65 to begin collecting your benefit, it would be $3,026 per year
or $252 monthly.
Of course, we still have to add your defined contribution benefit at both those ages.
Actually, I should point out to you that you can begin withdrawals from your account at
any age after you separate from service.
You don't have to start taking money from this account at the age you've chosen to begin
receiving your defined benefit pension check.
So, if you separated age 50, you can begin withdrawals then or postpone to some other
age up to 70 and a half.
At that age, you have to begin withdrawals or face significant tax penalties.
But for some comparison purposes now, we'll assume you'll take your defined contribution
withdrawals beginning at age 55.
I didn't know I had the flexibility of selecting different dates for receiving my pension check
and taking withdrawals from the defined contribution.
I like that.
But yes, let's do it at age 55.
At your withdrawal age 55, you'll have accumulated $50,167 in your defined contribution account.
Assuming you begin withdrawals based on your life expectancy, your withdrawals could begin
at approximately $266 per month and increase annually based on inflation.
But at age 60, you could change the method of withdrawal and take whatever amount you
want.
At age 65, your account balance would provide a monthly benefit of about $713.
However, at that age, you could use one of the other withdrawal strategies as well.
So, if we add your CSRS Plan 3 defined benefit to the defined contribution withdrawal, your
total age 55 monthly income would be $354.
And at age 65, it would be approximately $965.
Now, let's compare these numbers to your CSRS Plan 2 benefit at the same ages.
You can see that at age 55, CSRS Plan 2 does not provide a benefit while your CSRS Plan
3 retirement income would be $354 per month.
If you wait until age 65 to begin benefits, you would receive $504 per month from CSRS
Plan 2 and about $965 from CSRS Plan 3.
I realize you're pretty adamant about leaving when you're 50 years old, but I need to point
out to you that if you worked until age 55, you would have 20 years of service.
This would make you eligible for a benefit from CSRS Plan 2 at that age of $274 per month,
as well as increase the benefit you'd receive from CSRS Plan 3 defined benefit to $137.
In addition, the defined contribution withdrawal would increase to approximately $342 for an
estimated total of $479 from CSRS Plan 3.
Here's another thing to consider.
If you do work until age 55 and then delay receiving your benefits until you are age
65, your CSRS Plan 2 benefit would be $780 per month.
Under CSRS Plan 3, your defined benefit would be $526 and the defined contribution would
be $918 for a total of $1,444.
Why is there such a big difference in the numbers?
Well, for the defined benefit monthly amounts, there are three reasons.
First, you'll have more service credit.
Second, your average final compensation will probably be higher.
And third, CSRS Plan 3 has a special provision if you have 20 or more years of service.
That provision provides a monthly increase of a quarter of a percent for each month you
delay drawing your defined benefit after you separate from service.
The defined contribution account provides a larger benefit because you're working five
years longer and continuing to add 10% of your pay.
This is really interesting.
I am so glad you told me about this.
I guess I'm not really all that adamant about quitting at 50, especially if my husband isn't
going to stop working until he's 55.
Did I tell you we're the same age?
Yeah, so I was just giving myself an extra five years off.
But let me ask you one more thing.
If my defined contribution withdrawals are based on my life expectancy, I mean, what
happens if I live longer?
Would I run out of money?
If you continue to withdraw based on your life expectancy and your investments earn
at 8%, you could run out of money if you live longer.
But remember, I mentioned earlier that at age 60, you could switch to one of the other
withdrawal strategies.
So if your investments earned 8% and you withdrew at a 7% rate, your account would continue
to grow and you wouldn't deplete your account.
Oh, that's right.
I forgot.
Well, I'm planning on living a long time, so that's important to me.
But I wonder if the other withdrawal strategies will give me enough each month to cover expenses.
That's a good question.
The worksheets in the back of the book you received with your video will help you estimate
how much money you'll need in retirement.
I'd encourage you to work through them.
Do you have an idea as to which plan you're leaning toward?
You know, I really don't.
This is a lot to absorb.
I need to discuss it with my husband before I make my decision.
We need to start making our retirement plans, but it's such an important decision.
I think we need to make it together.
I think that's a good idea, Mary.
Just remember that you have to make your decision between September 1, 2000 and February 28,
2001 and earn service credit in January 2001 in order to receive the transfer payment.
And if you need additional assistance, you can always call this toll-free helpline again.
The number is in your book.
In addition, you've got the book, video, workshops, and the software.
When you're using the software, you can input different ages to separate, retire, and withdraw
so that you and your husband can coordinate your respective retirements.
There are so many sources of information.
There's certainly no excuse for procrastinating.
And I want to thank you so much for all your help.
You're welcome, Mary.
It was a pleasure talking with you.
Good morning.
Can I help you?
Hi.
My name is Tom, and I have my wife, Donna, on the speakerphone with me.
And we have some questions about retirement.
Hello, Tom, Donna.
Thanks for calling.
What kinds of questions do you have?
Well, I want to retire at 65 with the most amount of money.
I never really gave any thought to my retirement plan, but now I have to make a choice between
two plans called a SIRS Plan 2 or a SIRS Plan 3, and I'm not sure which is better for me.
Can you help us?
Well, Tom, I can't tell you what to do, but I think I can show you how to compare the
two plans so that you can make a decision.
But before we go any further, I need some basic information about you.
What kind of information?
Your birth date, what your current wages are, what month you want to stop working, and how
old you'll be at that time, how many years of service you had as of August 31, 1999,
and the amount of your SIRS Plan 2 account balance on January 1, 2000.
Also, the amount of any gain sharing payment you may be getting.
Oh, easy stuff.
My birth date is 12-20-39, and I'm earning $22,000 a year.
I want to retire at the end of August when I'm 65, and I have how many years of service?
Your transfer information sheet says you had 14 years as of August 31, 1999.
So at the end of August, when you're 65, you'll have 20 years.
And let's see, your account balance is $13,465, and you have an estimated gain sharing payment
of $5,172.
Oh, yeah.
Yeah, that's right.
So by the time I stop working, I'll have 20 years in, and I'll have $13,465 that I can
transfer to the SIRS Plan 3.
Okay, good.
But to help you compare with the plans, we'll have to do some calculations.
Ooh, math isn't my favorite subject.
That's all right.
We'll let the computer do the math for us.
I'm using the same software program that you can find at the website or at your school
district in May.
Sounds good to me.
Let's start with the SIRS Plan 2.
This is a defined benefit plan.
Are you familiar with how this plan works?
Yes, we are.
We know a formula is used to compute Tom's pension amount.
Yeah, we've read about the defined benefit formula.
Show us how it'll work for my pension.
Based on your average final compensation and years of service, the software estimates your
annual pension will be $9,624 or $802 per month when you're age 65.
Do we have to pay income tax on that?
It depends.
Any contribution you've made to the plan with an after-tax dollar won't be taxed again.
However, everything else is subject to taxation.
If you've contributed after-tax, the Department of Retirement Systems will notify you at the
end of the year as to what amount will be taxable.
What about Social Security tax?
No.
Here you get a break.
You only have to pay Social Security tax on earned income.
That means money you get for working.
Pensions, withdrawals from IRAs, or defined contribution plans and interest or dividends
don't qualify as earned income.
Well, that's good to hear.
What if I decided to retire at age 62 instead of 65?
What would my pension be then?
Unfortunately, you won't have enough years in at age 62 to be eligible to start drawing
up that age under the service plan 2.
In order to receive a defined benefit from the service plan 2 prior to 65, you have to
have at least 20 years of service in when you stop working.
If you stop working at age 62, you'll only have 17 years of service.
But, if you really wanted to stop working at age 62, you would still be eligible to
draw your pension at age 65.
That would amount to $7,487 per year or $624 per month.
Oh.
Well, I was planning on working to 65 anyway.
And $802 a month is almost $180 more per month.
That could come in handy.
So I guess it doesn't matter.
But what about Social Security?
Will drawing my Social Security reduce my pension benefit?
No.
Your Social Security benefit and your pension benefit are independent.
Neither one affects the other, so long as you've been working for employers that pay
into Social Security.
That's good news.
I know there are some folks who think it will.
That's too bad.
I hope they take the time to ask about this before they make their decision.
Your monthly Social Security check is based on the number of years you've worked and
the total amount you've contributed throughout your working years.
It has nothing to do with your pension.
If you're not sure what your Social Security benefit will be, contact your local Social
Security Administration office for an estimate.
Okay.
Good.
I'll do that.
But can you do the numbers for the other plan now?
Sure.
Sir's Plan 3 consists of two parts.
The first is a defined benefit program, and the second is a defined contribution program.
Yes, we've read about the new plan.
So what would Tom's benefit be if he transfers to Sir's Plan 3?
Well, the defined benefit portion of Sir's Plan 3 is figured almost the same way as in
Sir's Plan 2, except that the multiplication factor is 1% instead of 2%.
So based on his years of service and his average final compensation when he separates from
service, Tom's defined benefit will be $401 under Sir's Plan 3.
That's only half of what I'd get with Sir's 2.
But you still have the defined contribution portion, Tom.
How much will he get from that part of the plan?
Well, we don't know for sure, but we make certain assumptions to estimate possible amounts.
Assumptions and estimates and I don't know.
I'm the kind of guy that likes to know what I'm getting into.
I like guarantees.
What kind of assumptions do I have to make?
It's really not as difficult as it sounds.
The first assumption is what rate of return you think you might get on your investments
in your defined contribution account.
And the second assumption is what you think inflation will be in the future.
Although no one knows what these rates will be in the future, inflation has averaged approximately
3% over the past 15 years.
And investment returns have averaged as much as 18% during that same time period.
Before projections, we typically use an assumption much lower, such as 8% to compensate for any
possible future declines in the market.
Wait a minute.
Can you explain what you mean by a rate of return?
I'm not sure I understand.
Remember the information you got about how you'll be able to direct where your money
in the defined contribution will be invested?
Well, once it's invested, the value of those investments will change based on the market
conditions.
The change in the value of your investment over a period of time is your rate of return.
As I said before, no one knows what they will be, but in order to do our calculations, we
have to make assumptions.
Oh yes, I remember now.
There are going to be classes that we can go to to explain the investments and the rate
of return, but for now, I think we should assume 3% for inflation and 8% for rate of
return.
Are you okay with that, Tom?
Yeah, I guess so.
Remember that when you're using the modeling software, you can input different rates.
Okay, go on.
Before we calculate your benefit, let me ask you something.
You know you have to contribute to the defined contribution plan.
Have you had a chance to review the contribution options?
Yes we have, and we've decided that if we go with CSRS Plan 3, we'll contribute 5% of
Tom's pay.
I think that's option A.
Yes, you're right.
That's option A. And you know you can't ever change it, don't you?
Yeah, we know, but 5% shouldn't cause us a problem.
Okay, if we put the numbers into the computer, it looks like your defined contribution account
would be worth about $48,152 at age 65.
Based on your life expectancy, your withdrawal would be about $308 per month.
If we add this to the defined benefit, your age 65 CSRS Plan 3 retirement income totals
$709 per month at age 65.
That's less than the defined benefit under CSRS Plan 2.
That's $93 per month less than CSRS Plan 2 at 65.
But if you got a higher rate of return on your investments, your withdrawal would be
higher.
And if you got a lower rate, your withdrawal would be lower.
Yeah, that's probably true, but I told you before, I really prefer guarantees.
Isn't that what the defined benefit is?
Yes, it is.
With the defined benefit plans, your employer guarantees that you'll receive your pension
for as long as you live.
Plus, both CSRS Plan 2 and CSRS Plan 3 defined benefit plans are scheduled to increase with
the cost of living, up to 3% per year.
So you get a cost of living increase each year in retirement.
But couldn't we increase the withdrawals from the defined contribution plan each year too?
Yes, you could.
But remember, how much you can take out and how long your money will last depends on the
amount you contributed and the rate of return you receive on your investments.
The withdrawal calculation we did is based on your life expectancy, Tom.
But because you'll be over the age 59 and a half when you start your withdrawals, you
can take out any amount you want.
You could take out a fixed percentage or just whatever the investments earn.
In either case, it might be more than the amount we calculated.
I don't know, Donna.
I don't like basing our future on the stock market at this point in our lives.
If we had more years to go so the defined contribution could be larger, maybe, but...
I think you're smart to keep that in mind, Tom.
The rate of return we're using is an average over time, and you only have five years to
continue working.
These returns will fluctuate, and you could be left vulnerable to the fluctuations.
Also, you have to keep in mind that your contributions are limited by how much time you have to contribute.
You could be affected adversely by poor rates of return and the limited time to contribute.
Because you're closer to retirement than some of the younger employees, you don't have
a lot of time to recover if the rates of return go down.
If the market happens to be down in five years when you want to start withdrawals, your retirement
may not be as comfortable as you had planned.
Employees with many years until retirement can usually take on these types of fluctuations
more easily because they have a longer time until they'll need their funds.
Now, if I understood you right, in our situation, Plan 2 would give us a larger amount of money,
and it's guaranteed.
You're probably right, Donna.
Your age 65 monthly pension under CSRS Plan 2 came to $802.
With the assumptions that you've chosen for CSRS 3, it's an estimated $308 from the defined
contribution and $401 for the defined benefit.
That's a total of about $709 per month.
I think I like the CSRS Plan 2 a lot more.
At least with CSRS Plan 2, I know I'll have $802 coming in, plus that'll increase every
year and we'll have Social Security.
I've got my guarantees.
But I have something else to ask you.
What happens to Donna if I die before she does?
You want to know how much of the pension she'll get if you die before her.
Yep.
My health isn't so good and I want to make sure she's taken care of.
Oh, Tom, don't talk like that.
You're going to outlive us all.
Maybe, maybe not.
Let's find out what happens just in case.
I think that's smart, Tom.
There's a part of your defined benefit pension package called Survivorship Options and it
dictates how much of your pension Donna would get if you pass away first.
Explain that.
Here's how it works.
When you retire, you'll be able to choose to take your pension under option one for
your life only or to select one of the three other benefit payment options that will provide
Donna with a survivor's benefit of 50%, 66 and two-thirds percent or 100% of your pension
at your death.
If you select one of the survivorship options, your pension is reduced for your lifetime
and after you die, Donna will receive a percentage of that amount for the remainder of her life.
It doesn't sound like you want to take your pension for your life only.
No.
I want her to get something.
What would my pension be if I selected option two, 100% survivor benefit and how much would
Donna get if I die first?
Well, it looks like your plan two pension would be reduced to $589 per month for your
life and then if you die before Donna, she would continue to get that same amount for
the remainder of her life.
And remember, that pension goes up each year so Donna would actually get 100% of whatever
your pension is in the year you die and she would continue to receive those cost of living
increases throughout her life.
Now why is my pension reduced?
Because there's a guarantee to pay the benefit for two lifetimes.
The amount of your reduction is based on the difference in your ages.
Here's another thing to keep in mind.
If Donna dies before you, Tom, your reduced monthly payment will pop up back to the original
amount before the reduction, in your case, $802 per month.
Why?
Because the survivor that the money was being taken out for is no longer living.
The survivorship options are like a safety net set up to catch the survivor of the employee
once he or she dies.
But if there's no longer a survivor, there's no need for a safety net.
I get it.
Well folks, what do you think?
Have you got the right information to make a decision now?
I think we've heard the important parts, am I right honey?
You bet.
I think we've got the information we need to make a decision.
Thank you.
You've been very helpful.
As you can see, there are a lot of issues that you need to think about when considering
whether SIRS Plan 2 or SIRS Plan 3 is best for you.
Each of our participants had special situations that needed to be considered, and each learned
a great deal about both plans.
We hope you have too.
Oh, by the way, don't forget to check off that you've reviewed the video book pack on
your checklist.