You may be wondering: If I take the AAI Program buyout, how much will my lump-sum payment be? And how will my benefits be impacted?
The truth is, as an Illinois teacher, your pension is likely a large part of your retirement plan. Before deciding whether the AAI Program is right for you, it’s important to understand what, exactly, you can expect as far as benefits and compensation go if you take this voluntary election.
What Is The Lump Sum Payout Under AAI?
Under AAI, you will receive a lump sum payout that’s equal to 70% of the difference between your benefit if you had kept the 3% compounded annual increase, and your new 1.5% non-compounded annual increase. This amount is given to you either in cash, or it can be rolled over into an eligible retirement savings account. Keep in mind that if you take the lump sum in cash, you’ll be subject to a 20% tax withholding if you’re age 55 or younger. As this is payout of retirement money, my suggestion is to roll this money to a retirement account.
How is the Lump Sum Payout Calculated?
TRS has a unique calculation to determine your pension benefit under AAI. First, they start with their calculation of your initial monthly pension payment (assuming the 3% compounded annual increase). Then, they apply actuarial assumptions about your future (including your estimated life expectancy during retirement). They also assume that the value of the assets available to you in retirement will grow at an interest rate of 7%.
The assumptions that TRS makes to calculate your lump sum payout are standardized for everyone who voluntarily enrolls in the AAI Program from January 1, 2019, to June 30, 2021. The standards they’re using are based on your age and retirement date. Using these assumptions and calculations, TRS comes up with your lump-sum payout amount.
Here’s an example pulled from their AAI brochure that showcases what your lump sum payment would be based on retirement age, and initial monthly pension amount:
If you retire on June 1, 2019, at age 60 and your initial monthly pension payment is $3,000, your AAI payment would be $101,937. (That is $3,000 multiplied by the TRS AAI factor for age 60 of 33.979)
If you retire on June 1, 2019, at age 55 and your initial monthly pension payment is $6,000, your AAI payment would be $228,564 ($6,000 multiplied by 38.094)
Remember: You Don’t Have to Crunch The Numbers By Yourself
TRS offers all eligible Tier 1 plan members an AAI Program estimate based on their unique age and retirement date. In the report, you’ll get a side-by-side comparison of how your benefit will be impacted if you elect to enroll in the AAI Program, or if you stick with the 3% compounded annual increase pension benefit plan.
You can also reach out to me at any time with questions. I specialize in working with Illinois retirees – especially teachers as I’m married to one - and would be happy to help.
Next blog in the series: How to Make Sure You Don’t Run Out of Money If You Take a TRS AAI Buyout