The Illinois TRS recently announced a program that would buy out a portion of teachers’ annual cost of living benefit increases to their pension.  This program is in place for teachers retiring now until June 30^th, 2021.  The current annual cost of living increase for a Tier 1 TRS member is 3% compounded continuously starting at retirement. The buyout would give them a 1.5% annual cost of living increase compounded on their original pension that does not start until age 67.  What this means is that with the original 3% increase, it is increasing 3% based on what your current pension is that calendar year.  With the 1.5% annual increase, it is just based off of your original pension the year that you retire.  As an example, for a teacher whose pension would be $75,000 to start retiring at age 60, there pension would accelerate like below

The Buyout pension would look like

Note how the original pension goes up by $2,250 the first year and then continues to increase, whereas the bought out pension does not start increasing until age 67, and then increases a set $1,125 every year.  This illustration also shows in just 10 years this equates to a difference of over $20,000 in the amount of money a teacher would be receiving.  If you look further out at the example above the difference in the amount of money received between the original pension and the new pension after buy out climbs well into the hundreds of thousands and if you live long enough could even climb to over one million dollars. The following is the difference in pension value using the same starting salary as above over a 10, 20, and 30 year time period.

The actual buy out will be calculated from the difference of the cost of living benefits until age 85 at a 70% discount.  In the example above the buyout would be approximately $45,750.  This is a large sum of money, but when you compare it to the value of the pension you give up over a 10, 20, or even 30 year time period the original 3% it is a big difference.  There is no clear cut choice for everyone on what to do with this decision, since everyone’s situation is different.  Health, other savings, estate plans, retirement plans, and other factors should be considered before making a decision on this buyout.  If you are one of the teachers that will have to make this decision, make sure you truly know the numbers.  A financial planner, the TRS, and your districts benefit specialist should all be able to help, and before you decide to roll the money over I would suggest making sure you get a few different opinions.

The following is a link to an article on the TRS website that also explains this topic https://www.trsil.org/news-and-events/pension-issues/accelerated-pension-payment_alternative-Tier1AAI

Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This is a hypothetical example for illustration purposes only. Actual investor results will vary.