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How to Make Sure You Don’t Run Out of Money If You Take a TRS AAI Buyout 


Whether you’re a teacher, or you’re married to a teacher in Illinois, taking the TRS AAI buyout can bring up a retirement savings fear: 

What happens if you run out of money after taking the TRS AAI buyout option? 

The truth is, it’s possible to overspend when you receive a lump sum of cash. This could potentially hurt your future retirement savings plans, and jeopardize your future lifestyle. However, if your lump sum payout is part of a well-rounded financial plan, you’re more likely to find success in retirement. 


Invest According to Your Risk Tolerance 

When you take the TRS AAI buyout, you’re opening yourself up to more investment options. When your funds are in a pension, they’re invested according to what the pension views as best the overall sustainability of their plan. However, when you take a lump sum payout or buyout option, you’re giving yourself the opportunity to invest in a way that fits your goals and lifestyle 

Unfortunately, many people aren’t sure about the best way to invest their newfound lump sum of cash. They may take the funds out and sit on the cash if they’re uncertain and risk averse, or they might roll it over into an IRA and pick investments within the account. It’s important to make sure that, when you invest, you’re doing so with your risk tolerance in mind. As you near retirement, your risk tolerance may changeYou don’t have a long enough timeline between now and when you need your savings to “bounce back” from any potential market turbulence, so you may find your capacity for risk being lower. So, investing in high-risk investments isn’t the way to go.  

Use your lump sum in a way that takes longevity and risk into account, and make sure that it plugs into a larger retirement income framework 

 

Don’t Take Large Withdrawals 

When you first retire, there’s a temptation to let loose and splurge a little. I get it – you’ve worked hard to get where you are! Unfortunately, taking too-large withdrawals now can hurt your chances of living a financially comfortable life throughout the remainder of your retirement. It’s also bad for you tax situation if all of that money is coming out of tax-deferred retirement sources. It’s okay to spend a bit more on goals – as long as they’ve been budgeted for.  

 

Don’t View the Payment as a Cash Surplus 

Your retirement income is made up of three different factors: 

  • Social Security 
  • Savings 

  • Your pension 

For Illinois teachers by themselves, there is no Social Security. However, when you factor in spousal retirement savings as well, Social Security can become a significant piece of the “retirement income puzzle”. 

In a perfect world, you won’t be completely reliant on any one of these income pieces to have a comfortable retirement. However, it’s still important to remember that even if you have a more than adequate Social Security benefit and savings built up, your pension isn’t just icing on the cake. It plays a major part in your retirement income, even if you’re not relying on it to cover basic expenses. 

With that in mind, it’s important that you don’t look at your pension lump sum as “extra cash” to be spent any way you want. It needs to be viewed as part of your long-term retirement income, and invested or allocated accordingly.  

 

Partner with a Financial Advisor 

One of the best ways to build a comprehensive financial plan in retirement is to partner with a financial advisor. As a fee-only financial planner, I help my clients to look at every angle of their retirement income to create a plan that balances living comfortably for the long-term with achieving exciting short-term goals. It should be obvious by other blogs on this site that one of my specialties is helping retiring educators in Illinois, so this topic is not a one-and-done for me. 

Have questions about how your TRS AAI lump sum payment fits into your retirement plan? Schedule a call! I’d love to talk to you. 

Next post in the series: Why Should I Take an AAI Buyout - Is the Pension Not Secure?