The state of Illinois is giving us $3,000. That’s right. The Land of Lincoln, otherwise known as the Land of No State Budget, is actually coughing up money. So put on your hats and let’s get this TRS pension party started, shall we?
Where It’s Coming From
Where is this money coming from? The Teachers’ Retirement System and the state of Illinois. Now, before you fire up your torches and grab your pitchforks, let me make something crystal clear. This money is 100% my money.
It’s also worth pointing out that the state has been holding onto my money, presumably earning interest. Of which I get nothing. Cool story. Remind me to tell it again when someone tells me how teachers are single-handedly responsible for ruining the pension system.
And the only reason the state is paying up in the first place is because it put the kibosh on an Early Retirement Option program that both Mr. P and I have been paying into with 0.4% of our salaries for the length of our careers.
So yeah, that $3k isn’t so exciting if it means taking an early retirement option off the table. But it is that exciting coming from a state that is so chronically underfunded, I don’t even put our pensions into our net worth calculators or our retirement plans. Toot that party horn.
Where It’s Going
When we were notified of this change, we were informed that we had
three two options: Leave the money with the state until retirement, whilst earning no interest.
- Take a lump sum payment, paying a 20% federal income tax withholding.
- Roll it over into a select investment vehicle. Vroom vroom.
Before you can even say the word Vanguard, you had better believe I was halfway through
filling out the paperwork resetting my password to log onto my account that is current through the 2015-2016 school year. It made perfect sense to use this money to top off our Roth IRAs for the year. Perfect, I say.
But then, I thought about my goals. Maybe this would be the kick in the pants I finally needed to actually open a 403(b) with Fidelity. It would certainly give us a nice start. When I started to fret that I was stuck at yet another investing crossroads, I read the fine print.
The fine print says that I can move my money into “A Code Section 403(b) tax-sheltered annuity” or “A Code Section 403(b) annuity plan”. I am no Ed Mills at Millionaire Educator, but the former definitely seems like the type of 403(b) I am looking to avoid with Fidelity. Hello, fees, fees, and more fees. My suspicion was confirmed when the news of this refund first came not through the state or the retirement system itself, but through a flyer in my mailbox offering to afford me a brighter retirement courtesy of AXA. The absolute worst investment option for teachers. Just ask everyone. Even Forbes.
Spend My TRS Pension Windfall
So what do I need your help for, you ask? Why haven’t I already put the money into our Roths? Because we made the mistake of actually asking people their thoughts.
Virtually every other person my husband and I have talked to are taking out the lump sum. The only way I could see this as a smart money move would be if you were going to use that money to pay down some incredibly high-interest debt. If I were to take it out in a lump sum only to put it in savings or another type of investment, I’d get hit with the 20% penalty and then I’d pay taxes again sooner or later. Right. Right?
My fear is that this money seems like free money. Money made for vacations and Christmas presents, spa days and shoes. An early payout. An extra payday. A bonus from our very benevolent state. The reality couldn’t be farther from the truth.
The truth is it was our money to start with. It was set aside for our future. And that’s where I’m going to keep it.
So that’s where I need you come in, wise ones. Am I missing part of this picture? Can you imagine a scenario where it makes sense to take the money in a lump sum? Do you see something I don’t see?