The Rule of 86 - Understanding Your Pension

Today, I want to talk about misconceptions in one pension system and how easy it is to manipulate unsuspecting teachers.

Every state has its own pension system, and the rules are all different. So, while it is challenging for me, who writes to a national audience, to talk about a single pension system, I believe it is still beneficial. The rules of your pension system will definitely vary, but the main theme of this post is this… Understand your pension system’s rules so that you know what to expect in retirement AND so that someone can’t take advantage of you! Enjoy!

Missouri’s pension system (PSRS) has set the full retirement at the “rule of 80”. This means that your age plus your years of service must add up to be 80 in order to qualify for the full retirement multiplier. This multiplier is 2.5% or .025.

If you were to start teaching at the ripe, young age of 21, then you would have to work 30 years in order to hit the rule of 80. Let’s check the math (51 + 30 = 81). 51 comes from 21 + 30 years of service. At 29 years of service, you would not have yet hit the rule of 80 (50 + 29 = 79).

Since this hypothetical person has hit rule of 80 at 30 years of service, we can apply the full retirement formula to their situation. The full retirement formula is .025 x years of service x Average of the 3 highest consecutive earning years. .025 * 30 = .75 which means that you will be able to receive up to 75% of your pre-retirement salary in retirement. (I say up to because you can take single life, joint life, term certain, etc... a topic for another day)

If you talk to any group of teachers in Missouri, I guarantee that they will know about the rule of 80 and have at least a general idea of what it means. Let’s be real, most teachers are working for that retirement and have talked to an older teacher about their situation!

Interestingly, I often hear teachers/administrators talk about another option, the “rule of 86”. This always perks my ears up as I dig into their situation to find out more. What is it about the rule of 86 that you think you know and why is it beneficial to you?!

Here’s the backstory. The rule of 86 allows a teacher/administrator to do a Partial Lump Sum Option (PLSO). You are allowed to take a portion of your pension out (sometimes a really large amount) but it will reduce your monthly annuity for the rest of your life.

There might be some extreme outlier events that could lead to someone needing/wanting to take this option, but 99% of the time it is robbing future you in order to give yourself a big payday now.

And who, might you ask, spearheads these conversations most of the time… your “financial advisor”!

A lot of financial advisors and definitely all of the “financial advisors” make their money by managing the assets that you have rather than by getting paid to give advice. If they want to make more money off of you, then they need to have more money under their management. So, by taking $200,000+ out of your pension and getting it invested, these "advisors" are able to make good money off of you. DON’T FALL FOR IT!

What if… You retired in 2000 and had the dotcom bubble burst on your investments.

What if… You retired in 2008 and had the financial crisis/housing market burst on your investments.

Why take a risk pulling the money out of your pension when you have a guaranteed amount of money for the rest of your life (and potentially your spouse’s life too, depending on how you set it up)?

The truth is that the rule of 80 is important, but after that, you could hit the rule of 82, the rule of 84, the rule of 86… it doesn’t matter.

The formula will still hold at .025 x years of service x of the 3 highest consecutive earning years, with the only exception being that after you work at least 32 years your multiplier becomes .0255 (2.55%).

Every pension system is unique, but what is not unique is that every pension system has people who want to take advantage of the teachers who don’t know the rules well enough.

There are other situations that I will write about another day. One of these is the "max your pension" involving life insurance to offset your pension. Again, a topic for another day but just be mindful when someone is trying to mess with your retirement!

My request from you today is to take the time to learn about your pension system. Learn the rules so that you don’t get taken advantage of by someone who knows it better!

David Gourley

Founder/Financial Planner

K-12 Planning