As you are aware, one of the better benefits within the Florida Retirement System has been the automatic 3% Cost of Living Adjustment that FRS adds to your Pension checks each year. Over the course of a 24 year retirement, the COLA would almost double your annual pension, which would hopefully allow your standard of living to keep up with rising prices and inflation.

COLA is a simple process. Each year, beginning on July 1, your pension check is increased by 3% more than what it had been for the previous 12 months. That 3% compounds each year, meaning next year’s 3% pension increase will be added to last year’s pension increase, which was added to last year’s pension hike, and so on. To illustrate, let’s assume you Pension check is $2500 at retirement. Next year, it will be $2500, plus 3% ($75), so your pension check will be $2,575. Year three FRS will add 3% to the Second year amount which is $82.50, so the third year checks will be $2,657.50, and so forth. If you retire at 62, by the time you reach age 85 your monthly pension check will be almost $4,900!

As of July 1, 2011 there will be some changes made.

For those ** already retired, or those in the DROP, your benefit will remain the same**! No changes to your COLA will happen. You will still get your 3% per year.

For those still working, you will receive no further credit for COLA for the five years after July 1, 2011.

This cut will reduce your annual COLA going forward for each year you continue to work. The calculation is simple: Take the number of months you have worked prior to July 1, 2011, and divided it by the total number of months you have worked at retirement, then multiply it by the 3% COLA. Remember, entering the DROP is the same as retiring, so the calculation would be to the time you enter DROP.

For instance, if you have **24 **years of service as of July 1, 2011 (now!), and you continue to work until you have **30** years in, your COLA calculation is 24/30 = 80%, 80% of the 3% Cola is **2.4%** COLA for your retirement.

If you have **21 **years of service as of July 1, 2011 (now!), and you continue to work until you have **25** years in, your COLA calculation is 21/25 = 84%, 84% of the 3% Cola is **2.52%** COLA for your retirement.

If you have **27 **years of service as of July 1, 2011 (now!), and you enter the DROP when you have 30 years in, your COLA calculation is 27/30 = 90%, 90% of the 3% Cola is **2.7%** COLA through your DROP period, and the for the rest of your retirement.

You can see that the more years you have it NOW, the higher your percentage of COLA will be, either in the DROP or in Retirement. The current legislation stipulates that the COLA will return at 3% on July 1, 2016, so the maximum loss will be 5 years of credit. Let’s assume you have 20 years in now, and you DROP or retire at 30 years. You will get 20 years of credit up until July 1, 2011, then you will get NO credit for the next 5 years, and then you will get 5 years of additional credit for the time you work from July 1, 2016 until you DROP or retire with 30 years. The calculation is basically the same. You have 25 years of 3% COLA credit, and 5 years with no credit. Your COLA would be 25/30 times 3% = 2.5%.

It is important to note that pushing your retirement ahead in order to “lock in” 3% COLA will probably NOT prove to be your best option. By “locking” it in, you will forego any additional salary (at 100% of your earnings), as well as the future years service credit for years worked. It might provide you with a higher COLA percentage, but it will be on a smaller pension benefit. For Instance:

You have 24 years in Special Risk with an AFC of $50,000. You want to retire now, so that you will lock in 3% COLA for life. Your pension will be 24 years times 3% service credit = 72% of your $50,000 AFC = for a pension benefit of $36,000 per year. Because you elected to retire early, your benefit will be reduced by 5% as a penalty for early retirement (the penalty is 5/12 or .0042 per month or 5% per year you retire before your “normal retirement age”), so your first year benefit will be $34,200. Your second year pension will increase by a 3% COLA, or $1,026, for a 2^{nd} year benefit of $35,226.

Had you worked that one more year to get you to the 25 year “normal age of retirement”, the scenario is this. Your first year benefit is 25 years of service, times 3% service credit per year = 75% of your AFC = $37,500 benefit for the first year. The 2^{nd} year your benefit goes up by the calculated COLA (24/25 times 3%) of 2.88%, or $1080! Your 2^{nd} year benefit is $38,580. By “locking in” the 3% COLA, you effectively lost over $3000 for just the second year.

Make sure you do the math! Locking in the COLA by retiring or entering the DROP early will very likely cost you a lot of money. Obviously, it is not as good of a benefit as it was, but don’t make a foolish mistake that will cost you dearly in the future. A percentage of 3% is better than NO COLA.

We hope this helps! We encourage you to discuss your options with a financial advisor who is familiar with FRS and with your personal financial situation.

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