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To choose the best South Carolina state retirement plan our CERTIFIED FINANCIAL PLANNER™ practitioners analyze your goals, retirement horizon, appetite for risk, cashflow and many other factors while constructing your personalized financial plan. If you would like to learn more about developing a comprehensive financial plan, reach out to Oak Street Advisors today Employees of the state of South Carolina, which includes full time employees of state school districts, full time employees of state supported colleges, universities and technical colleges, full-time employees of the state of South Carolina or any of its departments, agencies, bureaus, commissions, and institutions, are eligible to participate in the South Carolina retirement plans.
There are two main types of plans offered by the state of South Carolina. The SC Public Employees Benefit Authority (PEBA) offers the South Carolina State Retirement System (SRS) plan, which is a traditional defined benefit pension plan; and the SC Optional Retirement Plan (ORP), which works like a 401k defined contribution plan. Under both plans you contribute 9% of your gross pay on a tax-deferred basis. Selecting the best plan for your family is one of the most important decisions you’ll make in your life. If you do not specify a selection within thirty days of your hire date you will automatically be assigned to the State Retirement System plan. Because the choice is so crucial to your retirement, we will go into depth on each plan and list the positives and negatives associated with each choice. SC STATE RETIREMENT SYSTEM (SRS) The retirement system divides employees into two classes of participants. To try and be clear and save you some time we will separate this section by employee class. Read the sub-section that is important to you. SC PEBA Employee Classes: Class Two - those employed before July 1st, 2012 Class Three - those employed on or after July 1st, 2012 are considered Class Three participants CLASS TWO EMPLOYEES The benefits under this plan are based on your attained age and years of service. The monthly benefit you receive is calculated by multiplying your Average Final Compensation (12 highest consecutive quarters of earnable compensation in which you made regular member contributions and were earning service credit. An amount up to and including 45 days’ termination pay for unused annual leave at retirement may be included in your AFC calculation) by 1.82%, then multiplied by your years of service. For example, if your AFC were $60,000 and you were an employee for 30 years, your benefit would be: .0182 x 30 (years) = .546 Average Final Compensation $60,000 divided by 12 = $5,000 Monthly benefit = $5,000 X .546 = $2,730 CLASS TWO: EARLY RETIREMENT AND REDUCTIONS TO YOUR BENEFITS Important Notes About Early Retirement: 1. Class Two participants can retire with full benefits after 28 years of service or at age 65. 2. Class Two participants can also receive reduced benefits at age 60 or at age 55 with 25 years of service. This is an area most employees need help with. Similar to the Social Security system, early retirement from the SC PEBA has a dramatic and permanent effect on your monthly benefit. Class Two participants can retire at age 60, but your benefit is reduced by 5% for each year you receive a benefit before age 65. For example, using the benefits from the example above, if you retire and elect to receive benefits at age 60, your monthly pension check would be reduced by 25%! The amount you would receive would be permanently reduced by $682.50 per month, leaving you with income of just $2,047.50 of monthly pension income. Multiply that reduction by the 20 years or more most retirees will live after employment and you’ve cost yourself over $200,000 in lifetime income. Class Two participants can also begin receiving benefits as early as age 55 if they have 25 years of service. The reduction is even more onerous at 4% for each year before they achieve age 65. Taking our above example would result in a 40% reduction of monthly income. That results in a pension check of just $1,638 and forgone lifetime earnings of more than $300,000 for someone living to age 80. CLASS THREE EMPLOYEES You must be a participant for no less than 8 years to receive a pension. Class Three participant calculation of AFC (Average Final Compensation) is a slightly different than Class Two’s calculation. Take the 20 highest consecutive quarters of earnable compensation in which you made regular member contributions and were earning service credit. * *Termination pay for unused annual leave at retirement is not included in the AFC calculation. Then you use the same calculation as Class Two above: .0182 x 30 (years) = .546 Average Final Compensation $60,000 divided by 12 = $5,000 Monthly benefit = $5,000 X .546 = $2,730 CLASS THREE: EARLY RETIREMENT AND REDUCTIONS TO YOUR BENEFITS
HOW BOTH CLASS EMPLOYEES CAN AVOID EARLY RETIREMENT BENEFIT REDUCTIONS Because the reductions to your monthly pension are both permanent and severe, you should usually try to avoid taking your pension prematurely. You’ve probably noticed that people are living longer-- the life expectancy for American males who reach age 60 is currently another 21 years and for females another 24 years. Therefore, deciding to take your pension early and suffering a substantial reduction in your benefits must make sense from a break-even analysis. In the examples we used above, a retiree who chooses to receive benefits early would receive monthly benefits of $2,047.50 for 60 months before their Normal Retirement Age. Essentially starting with a $122,850 lead over a participant who waits until 65 to begin their benefit. But the participant who delays receiving their benefit earns $682.50 more each month. If you divide the $122,850 by the amount of additional income received from delaying pension benefits, you see that after 180 months both participants have received the same dollars in total retirement income. The longer you live, the better the decision to delay benefits becomes. If you have health issues that could impact your longevity, taking an early benefit could make sense. If you’re healthy, and particularly if you’re female, delaying benefits is likely to be a better deal. You can find a good life expectancy calculator at LivingTo100.com. HOW TO RETIRE EARLY AND AVOID REDUCED BENEFITS One way to retire before your normal retirement date and also avoid taking reduced benefits is to utilize the state’s additional 457b Deferred Compensation Plan. With this plan, you can contribute extra funds to build a bridge between your planned retirement date and age 65 when you receive full retirement benefits. How much you need to accumulate in this “bridge” account is fairly straightforward to calculate. Multiply your annual pension income by the number of years you expect to retire before reaching age 65. That becomes your saving target. Working with a CERTIFIED FINANCIAL PLANNER™ will help you determine the exact amount your “bridge” should be, and the monthly savings needed to build it. With this bridge in place, you can replace any income shortfall while you still delay claiming your benefit in order maximize your future pension income. ADDITIONAL CONSIDERATIONS SURVIVING SPOUSE ELECTIONS When selecting your retirement benefit you can choose to receive benefits that end when you die, remains the same for a surviving spouse, or provides a lower benefit for a surviving spouse. The best choice for you will depend on a variety of factors including you and your spouse’s life expectancy and family retirement assets. It usually will make sense to choose an option that provides some income for a surviving spouse. What makes this plan great is the option to change the survivor election if the non-participating spouse predeceases you. In this scenario, participants can revert to the single life option, increasing their current monthly pension benefit. Before making this irrevocable choice, it would be wise to consult with a CERTIFIED FINANCIAL PLANNER™. INFLATION PROTECTION The SC State Retirement System Plan also includes some protection against inflation in the form of a 1% annually cost of living increase, subject to a $500 annual cap. This limited inflation protection means you should have additional retirement savings to protect the purchasing power of your retirement income. OPTIONAL RETIREMENT PROGRAM The Optional Retirement Program is a Defined Contribution plan. This means the funds going into your plan are defined, but the outcome of those invested funds is not. Participants contribute 9% of their gross income into the plan and the State of South Carolina contributes another 5% on their behalf. The retirement benefit you receive when you separate from service depends on how well the investments inside of your plan perform. Your outcome could be better or worse than the traditional SRS pension plan. The money in your ORP is always yours and you are 100% vested in the account balance from day one. There is an annual open enrollment from January 1st to March 1st each year when you may change providers, or switch to the SRS pension plan if you have been a participant for less than 5 years. There are currently four providers of the Optional Retirement Program:
Each provider charges administrative fees that are in addition to the fund expense ratios.
For a quick comparison of providers, click here. All of these are reasonable fees. You should compare the fees charged by the individual mutual funds within the plan to compare total fees and expenses. WHICH PLAN IS BEST FOR YOU? Determining the best option for you is a big decision. We recommend you give this a lot of thought. A good place to start can be found on page six of the “Select Your Retirement Plan” booklet available online. Want a CERTIFIED FINANCIAL PLANNER™ practitioner to help you make this decision? Reach out to Oak Street Advisors today. |
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