OTRS - Partial Lump Sum Option (PLSO)
What it is, how it works and what to watch out for.
The Partial Lump Sum Option (PLSO) is an additional option for retirees with 30 years of service with an institution. Its an option which allows a retiree to take 12, 24 or 36 months of monthly retirement benefits, all at once.
The PLSO will lower a retiree’s lifetime monthly benefit as seen in the sample table below.
For example if Dr Pete elects the PLSO 24 and the Max Option. He will receive $76,719 upon retirement and then $2,641.12 a month for his lifetime.
If he didn’t elect the PLSO, Dr Pete would receive $0.00 upon retirement and $3,203.69.
For the folks who ran the numbers, to make up the monthly benefit difference (3,203.69 - 2,641.12 = 562.57 x 12 = 6,750.84 / 76,719 = 8.8% return on investment)
Unless you have very specific plans and/or needs for the lump sum of cash, then the money would need to achieve a rate of return of 8.8% to make up the monthly shortfall.
And that’s not accounting for the tax consequences of a lump sum distribution. Since the PLSO is coming from a tax-deferred account, if you withdrawal the lump sum, you will have to pay taxes on the total amount as if it was one big paycheck.
You do have the option of doing a rollover and transferring the lump sum into an IRA which will preserve the tax-deferred status of the money.
PLSO Factoring
At the bottom of the above table you will find the line, “Lump Sum Multiplier” with three percentages in three columns. The actual numbers are based on actuarial science which I can’t explain. However, how the factor works is manageable.
As you can see, the factor or percentage drops if you take the larger lump sum.
If you take a larger lump sum, your take a larger reduction to your monthly benefit.
Your age also plays into the calculation. The older you are when you make the election, the lower the percentage.
Conclusion
Of course everyone’s situation is different so I can’t give advice on which retirement option you should choose nor can I advise on the PLSO. However, a solid rule of thumb is to leave the money in the pension unless you have an urgent need for cash or you have other investments that can cover your retirement needs.
Due to the tax consequences, please make sure you understand how a PLSO will affect your taxes or consult with a tax or financial planning professional.