As a law enacted in the 2018 Illinois budget, TRS is now able to provide Accelerated Pension Buyouts (APB) to those that currently don’t teach under TRS anymore. These members are known as inactive members, because they have a vested pension but it is not currently growing through active employment. Those eligible include Tier 1 participants with at least 5 years of service, and Tier 2 participants with at least 10 years of service.
For those interested in the buyout, it is calculated using the current vested benefits, and how much TRS expects to pay the participant over their retirement period. TRS will then discount this amount back to current dollar values, and then provide 60% of that benefit as a buyout. While it seems to be a small benefit to take as a buyout, here are some examples of where it may work out:
If your tenure in the TRS Tier 1 system is less than 6 years, your pension benefit isn’t going to be substantial and most likely won’t impact your retirement that much. If you have gone on to work in the private sector or have an IRA that holds other retirement funds, the benefit may be better served being put with other funds, so the power of compound interest can be put to best use.
High retirement-income households
In a household where the pensionable retirement income is projected to be high (think – retired administrator), there is no option to bring retirement income down to a lower tax bracket. If a smaller pension were also in this scenario, it will be taxed at this high income tax rate as well. By taking the APB, you can move the buyout of the smaller pension benefit to an IRA and defer taking the income until a later date. If rolled to an IRA, it can also be gifted to charities if the money is not needed after age 70.5, when withdrawals are mandated.
Tier 2 members
When Illinois’ TRS Tier 2 was introduced, it changed various rules from Tier 1. The retirement date for full benefits changed from age 60 to 67. If an inactive Tier 2 teacher with 10 years of service (different than 5 years for Tier 1) is now working in a different career, chances are they may retire earlier than 67, and need retirement income before this age. If a teacher started in Tier 2 and taught for 10 years, chances are they are still in their 30’s. Taking this refund and then giving it a number of decades to grow may outpace the final benefit it would have created.
Non-reciprocal pension participants
If an inactive participant holds multiple pensions, with TRS being the smallest and none of them being reciprocal (meaning you can join them together for one big benefit), then taking a refund from TRS might be appropriate. As the TRS pension won’t benefit from any of the other pension formulas, and with it being the smallest payout, there are two reasons a buyout might be the best option.
- If multiple pensions are providing retirement income, diversifying this to investable retirement assets (i.e. an IRA) is most always recommended.
- As the TRS benefit doesn’t become substantial until a reasonable tenure has been achieved (based on the formula used to calculate the pension benefit), taking a smaller benefit now instead of a small amount of income each year might be more beneficial.
As always, everyone’s situation is different. It’s important to get your entire situation reviewed by a financial planner to determine which course of action is appropriate for you. Feel free to reach out if you have questions.