Understanding Oregon PERS Lump Sum Options

Oregon PERS is full of intricacies and detail. Today, I’m exploring the lump sum options available on your Oregon PERS Benefit Estimate.

I’ve covered Oregon PERS Options 1 – 3A in several other blogs and videos (e.g., “Deciding Which Oregon PERS Pension Benefit is Right for You“). Since these are the most common choices individuals make, I focused my attention on them.

I’ve often warned that lump sum pension options are only suitable in very specific circumstances because they reduce or remove the option for a lifetime pension from Oregon PERS. However, my caution to proceed carefully with lump sums shouldn’t be mistaken for a complete disregard. Understanding your options is always beneficial.

If you learn best by reading, carry on. Otherwise, check out the video below:

 

Diving into Oregon PERS Lump Sum Options

Oregon PERS Lump Sum Options Overview

When people hear about the ‘lump sum’ option, they often think of the total lump sum that pays out the entire account balance, eliminating the pension benefit altogether. However, your PERS benefit estimate shows that there are lump sum options that also come with a monthly benefit.

Member Balance and Oregon PERS Lump Sum Calculations

All lump sum options are based on your member balance. On page 3 of your formal benefit estimate, you’ll find your current account balance and the projected account balance at retirement. This projection is based on the retirement date you requested. For those with a variable account, this information will also be included.

For all lump sum options, the variable account balance (if applicable) is combined with your member account balance to make up the lump sum available at retirement. The lump-sum formula is your final average salary times creditable service times, a statutory factor of 1% for general service employees and 1.35% for legislators, police officers, and firefighters. You can receive the lump sum all at once or in up to five consecutive annual installments.

Pension Availability with Oregon PERS Lump Sum Options

On your benefit estimate, you’ll see both a ‘no purchase’ and a ‘with purchase’ column. The ‘with purchase’ column includes purchases that are available to you, such as waiting time for most Tier 1/2 members. PERS allows you to buy back the first 6-8 months you worked before you were eligible to participate in the plan. In most cases, this is an affordable upfront purchase that increases your lifetime benefit and is worth considering. You will find the cost of your waiting time and any other available purchases on the last page of your benefit estimate.

 

Specific Oregon PERS Lump Sum Options

If you choose any of these partial lump sum options, your monthly benefit will be calculated using the Money Match method or the lump-sum formula, whichever is greater.

Lump Sum Option 1

You receive the lump sum amount and a pension for your whole life. When you die, the pension amount disappears.

Lump Sum Option 2

You receive a pension for your whole life; when you die, your spouse receives the same benefit (100%).

Lump Sum Option 2A

Similar to Option 2, but if your spouse predeceases you, you can move up to the Option 1 amount (the highest lump sum benefit amount).

Lump Sum Option 3

You with a pension for life, and when you die, your spouse receives half. This option offers a slightly higher amount than Option 2.

Lump Sum Option 3A

Similar to Option 3, but if your spouse predeceases you, you can move up to the Option 1 amount.

Total Lump Sum Option (Double Lump Sum Option)

The total lump sum option, also known as the double lump sum option, eliminates your pension altogether. Instead, you receive a lump sum, which is a refund of your member account balance and a matching amount from your employer’s account. I’ve had clients try to hand-calculate this, but I suggest getting a formal benefit estimate to ensure accuracy.

 

What to Do with Your Oregon PERS Lump Sum

In any of these instances, the question arises: What should you do with the lump sum amount? You can roll it over into a traditional IRA or an eligible employer plan, or take it as cash.

Rollover to Another Retirement Plan

Rolling over your Oregon PERS lump sum into an IRA or to another employer plan involves transferring your lump sum payout directly into a tax-advantaged retirement account. This process helps you defer taxes on the distribution and allows your funds to continue growing tax-deferred. By choosing a rollover, you avoid the immediate tax burden and potential penalties associated with taking the lump sum as cash. The rollover process typically involves filling out specific forms provided by PERS and the receiving financial institution. Once completed, your funds will be transferred directly into your new account. This method offers control over your investments, allowing you to choose from options tailored to your risk tolerance and retirement goals.

Cash Option Considerations

The cash option comes with a hefty tax bill, which is why PERS automatically withholds 20% for federal withholding upon distribution. A total lump sum payout in cash can impact your overall tax liability, Medicare IRMAA surcharges, and more. Like all choices, it should be carefully considered. I recommend consulting with your financial planner and CPA before making a decision.

What happens to the lump sum—whether it’s taken as cash, rolled into a retirement account and invested, or used in other ways—will significantly impact how it supports you during retirement and whether it’s available to your heirs.

 

Comparing Traditional and Lump Sum Options

Here’s a quick example of how traditional options and lump sum options differ:

Traditional Option Example

This sample benefit estimate provided by Oregon PERS shows Ima Member was born in 1965, making her 59 years old. Let’s say Ima is married and comes from a family of long-livers, living until she’s 89. She chooses option 2A with purchase. Over the next 30 years, Ima collects $1,089,745 in benefits (2% COLA not factored in). If her husband outlives her, that pension could earn more. If he dies before her, she may collect more by stepping up to Option 1 pension amount. There are a lot of safety nets here for both Ima and her husband.

Oregon PERS Lump Sum Purchase 2A Example

Now compare that to the lump sum purchase 2A. Her lifetime pension benefits would total $666,190 (again, 2% COLA not included, for simplicity’s sake). Like the traditional Option 2A, she could step up to Option 1 if her partner predeceases her, or he could collect after her passing. The safety nets are here, but they’re smaller because the benefit amount is smaller.

The key here is the $113,555 lump sum. If she takes that amount, puts it into a traditional IRA, and invests it, it could grow. It could also drop. (It will likely do both, depending on what she’s invested in.) If she uses it to invest in her nephew’s tech start-up and loses everything, there’s no arguing she’s worse off than had she taken the pension. 

This approach creates more unknowns, and most of the time, my client families aim to reduce these as they move into retirement, particularly concerning income replacement.

 

Who is the Oregon PERS Lump Sum Option For?

Scenario 1: Health Concerns

One scenario might involve someone with serious health concerns. If a member has a medical condition that significantly reduces their life expectancy, taking a lump sum might be a prudent choice. This ensures they can access their accumulated funds to cover medical expenses, improve their quality of life, or provide financial support to their beneficiaries.

Scenario 2: High Lifetime Income Partner

Another scenario might be someone whose partner has significant lifetime income, making additional income from a full PERS benefit a tax burden. Instead of fixed monthly payments, they can invest the lump sum according to their financial goals and risk tolerance.

Scenario 3: Significant Debt

Another scenario might be someone who has a significant amount of debt and needs to pay it off to achieve financial stability. If a member has accumulated high-interest debt, such as credit card balances or personal loans, a lump sum can provide the immediate funds needed to eliminate that debt. By paying off the debt, the member can save on interest payments and improve their overall financial situation.

 

Conclusion

I often joke that if you know when you’ll die, I can precisely pinpoint the best Oregon PERS Pension option, Social Security claiming strategy and investment withdrawal plan. But, of course, we don’t have that certainty. Whatever pension option you choose, make sure it’s the one that takes care of you for the long haul, considers your risk tolerance, and offers stability to your financial plan both today and 30 years from now.

If you want more information about Oregon PERS lump sum options, visit the Oregon PERS website. To better understand your benefit estimate, check out our blog: “How to Read Your Oregon PERS Benefit Estimate.” You can find more Oregon PERS resources in the other blogs here on our site, and on our YouTube channel. If you have a specific question about Oregon PERS, drop me a line. If it’s on your mind, it’s probably on someone else’s. I’m happy to provide a resource to help.