The 6 Questions You Need to Ask About State of Alaska Retirement
The State of Alaska Retirement System offers many benefits to SOA employees, but do you know if you’re making the most of the retirement benefits available to you? The truth is, with an abundance of benefits options you can get easily overwhelmed with all the choices. Obviously, you want to make the best choice, but navigating what’s available to you within the SOA Retirement System is a challenge, to say the least.
Working with a financial advisor who is well versed in the State of Alaska Retirement System is a great first step. As a SOA Employee, you then need to ask the right questions that lead to the best decisions pertaining to your plan and retirement.
Here are the six most common questions SOA employees have and what you need to know BEFORE you retire:
1 - Is My Plan Good Enough?
As a State of Alaska employee, you don’t have the option of choosing a defined contribution plan or a defined benefits plan. Everyone who entered on duty after June 30, 2006 are only eligible for the defined contribution plan. This raises a more nuanced question:
Is my PERS/ TRS Defined Contribution Plan good enough – in comparison to the PERS/ TRS Defined Benefits Pension Plans?
The PERS 4 and TRS 3 Defined Contribution Plans are plans in which you contribute, along with matching contributions from your employer, to an investment account intended to fund your retirement.
A PERS 1-3 and TRS 1&2 Defined Benefits Pension Plans are plans in which you are promised a specific pension payment in retirement based upon your tenure, age, and job position upon retirement.
Both plans offer benefits as well as some possible downsides.
The defined contribution plan’s value is determined by the performance of investments over time. If those investments perform well, your retirement account will grow to reflect it. However, poor performance over the life of the plan could result in the need for additional retirement income.
The defined benefits pension plan offers security in a guaranteed amount of retirement income. However, if it is not enough to fully fund your retirement, additional income may be necessary.
Both plans work and can be effective depending on your retirement goals and the amount of risk you are comfortable with.
2 - Should You Exercise the Survivor Benefit Option or Last Survivor Option?
Nonoccupational and occupational death benefits provide a benefit payment to survivors when a PERS member dies. Your beneficiary designation determines who receives your death benefit. If you have elected to receive your pension benefits under the Joint and Survivor Option then your spouse is eligible for continuing survivor benefits.
A continuing survivor benefit must be elected if you are married, unless your spouse agrees to some other form of benefit. After your death, your surviving spouse is eligible to receive 50%, 75%, or 66 2/3% of your reduced benefit. Your retirement contributions will reflect the option you choose.
Should I elect the 50% or 75% Survivor Benefit, or 66 2/3% Last Survivor option?
Here is a quick snapshot of each option:
75% Joint and Survivor Option
With this option, your benefit is actuarially reduced from what it would normally be. Your spouse would receive a lifetime, monthly benefit equal to 75% of your reduced benefit after your death. If your spouse dies first, your benefit does not change.
50% Joint and Survivor Option
Under this option, your benefit is actuarially reduced from what it would normally be. Your spouse would receive a lifetime monthly benefit equal to 50% of your reduced benefit after your death. If your spouse dies first, your benefit does not change.
66-2/3% Last Survivor Option (Not available for PERS 3)
This option is unique compared to the two above. With this choice, your benefit is actuarially reduced from what it would normally be. However, if your spouse dies first, your benefit would be reduced to the 66-2/3% survivor benefit instead of not changing like the other options. If you die first, your spouse would receive 66-2/3% of your reduced benefit.
Which option should you choose? Well, you must first look at how much benefit your survivor will need after retirement. Look at it like any other insurance. What are you willing to pay for assistance when the receipt of the benefit is uncertain?
The benefit for each is actuarially reduced and based on changing statistics each year. For more information on specific reduction data for each option go here.
Here is an example:
In this scenario, the primary benefit was reduced by less than 8% with 75% survivor benefit versus 5% with a 50% benefit. If there is any possibility at all the survivor needs or can benefit from this extra coverage, the extra insurance of 75% to the survivor is well worth the minimal loss to the primary recipient.
3 - Should You Take Advantage of the Long-Term Care Policy or Not?
When it comes to long-term care (LTC), the future is unpredictable. The two biggest questions you will have are:
- How long will I need it?
- How much will it cost?
*See graphic below.
Long-term care insurance policies can be helpful in covering expenses as you advance in age. When you retire, you can choose an LTC election. However, you must decide when you retire if you want this option as it cannot be added later. The most important factor to consider is your health, then assess the extent of your financial resources. If you can comfortably afford it, an LTC policy may be a great choice.
However, if you are healthy, own your own home, and have other financial resources from which to draw, then you can use your home and personal assets to pay for long-term care instead of an LTC policy.
Here’s why:
- Long-term care expenses like living in a facility can be exorbitant. However, it’s important to have the right perspective. Your other lifestyle expenses will be dramatically reduced. You won’t need to drive a car, shop at grocery stores, etc. Also, home care is less expensive accordingly.
- Like COLA, this benefit is reduced if you go out of state. Given that long-term care in Alaska is one of the most expensive in the nation, this is a realistic limitation and not a deal-breaker.
- Long-term care is an acceptable and suitable reason to assume debt on your house.
- A HELOC or reverse mortgage can generate cash flow from an otherwise illiquid asset. Besides, you can’t take your house with you.
- You will most likely not use all the equity in your house anyways (again, see graphic). You can always pay debt off or not use a line of credit if you don’t need it.
If you are uncertain about your state of health or expect family-history related health problems, SOA LTC may be a great addition to your plan.
4 - Should You Retire in Alaska or Not?
Alaska is a beautiful state, but its cold, long winters and distance from the lower 48 make the option to leave after retiring enticing. If you’re considering this, you must weigh your options when it comes to your retirement benefits.
If you move out of Alaska after retirement, you will lose the COLA portion of your pension benefit (see graphic below). However, that may not need to be a deal breaker. Consider these reasons:
- COLA is designed to adjust to your local cost of living expenses. COLA in Alaska is high because the cost of living in Alaska is high. Presumably, moving to the lower 48 will have lower expenses and you will be able to live similarly without the additional benefit.
- Most likely, meeting your goals and vision for retirement is more important than receiving a COLA benefit. For most, maintaining COLA isn’t a good enough reason to stay separated from family or locked into the winter weather.
- Some people go back and forth to meet minimum “domicile” requirements. This may work in your younger days, and it provides a great reason to go back home to visit family and friends. However, it becomes increasingly hard as you age.
Alaska COLA Graphic:
5 - For Healthcare in Retirement, Should I Go With an Alaska Care Retirement Health Plan or Medigap?
When in retirement, you have several healthcare options available to you. You can choose an Alaska Care Retirement Health Plan or you can choose a Medigap plan, which is a Medicare Supplement Insurance that fills the gaps in original Medicare.
With my PERS 4 Direct Contribution Plan, should I purchase the Alaska Care Retirement Health Plan or Medigap coverage instead?
Strictly from a financial advice point of view, if you can retire from the system with ten years of service, the better option is to purchase Alaska Care with the expected premium contribution than to choose Medigap coverage.
This is because your Alaska Care Retirement Health Plan will not be subject to Medicare treatment limitations. In-network options are more extensive than what is available through medicare alone.
6 - Should I Buy My Way Out of My Pension Indebtedness?
Pension indebtedness occurs when your retirement account is underfunded due to deficient contributions.
You can “buy” your way out of pension indebtedness by making payments or additional contributions to your retirement account. If you don’t, your monthly retirement benefit will be actuarially reduced over your lifetime.
However, this buying your way out of indebtedness may not be the best option for you.
Like social security, there is a break-even point. If it is worth it to pay back your indebtedness depends on when you plan to retire and how long you expect to receive your benefit.
- For TRS 1-2 employees, who can begin to receive their full pension well before the traditional retirement age, it is worth maximizing your pension benefit since you expect to receive it longer.
- PERS 1-3 employees, you must do some research. There are different age restrictions on when your benefit can start.
Where to Go from Here
Making the most of your SOA Retirement Benefits goes beyond simply maxing out your contributions. What is covered here merely scratches the surface of some of the questions you may have as it relates to your retirement benefits as a State of Alaska Employee.
The important thing to remember is that you don’t have to figure it out on your own. Working with a fiduciary fee-only financial advisor who is deeply familiar with the State of Alaska Retirement System can not only help you make sense of your retirement benefits, but also help you make the most of them as you plan for your life after you retire.
Schedule a call today and ensure your retirement is secure.