Welcome to Part 1 of our multi-part series designed specifically for members of the State Universities Retirement System Retirement Savings Plan (SURS RSP) who are approaching retirement and want clear guidance on their options. This guide will help you make sense of your choices and confidently decide what to do with your account balance as you transition to retirement.
Who is this guide for?
This guide is tailored for those in the SURS RSP, which is a defined contribution plan. In a defined contribution plan, the amount you and your employer contribute is fixed, but your retirement benefit depends on the investment performance of your account. You are responsible for making decisions about how your balance is managed and ultimately distributed.
Who is this guide NOT for?
This guide does not apply to those in the SURS Traditional and Portable Plans, which are defined benefit plans. In a defined benefit plan, your retirement benefit is determined by a formula based on your salary and years of service, and you receive a guaranteed monthly payment in retirement. SURS manages the investments, and the State of Illinois bears the risk.
Three Main Paths of Retirement
As you approach retirement under the SURS RSP, you’re faced with three main paths for your account balance:
Path 1: The SURS Secure Income Portfolio (SIP)
This is the default choice for participants. The SIP is part of the Lifetime Income Strategy (LIS). Many believe this is the only option available, but it’s just one of several.
Path 2: A Traditional Annuity
Instead of the SIP, you can opt for a traditional annuity, which converts your account balance into a stream of guaranteed income for life.
Path 3: Deferring or Taking a Non-Annuity Distribution
You may also choose to leave your funds invested or take your balance as a lump sum or partial withdrawals, rather than converting it into an annuity.
This series is intended to demystify your choices within the SURS RSP, debunk the myths about default options, and empower you with the knowledge to select the path that best suits your goals and circumstances. In Part 1, we’ll help you understand exactly what the SIP is, how it works, and how it fits into your overall retirement plan. We’ll cover the pros and cons of choosing the SIP in our next installment.
Stay tuned for future installments where we’ll break down the pros and cons of each path and guide you through the crucial decisions that will shape your retirement.
Questions About Health Insurance? See our Retiree Health Insurance Under SURS: An Explainer.
Path 1 - Retiring under the SIP
The SURS LIS and SIP are the default options for participants. You may opt out of these paths through your SURS Voya login. Assuming you do not, you would be automatically enrolled into the LIS investment portfolio and eventually into the SIP through a predetermined glidepath which begins at age 50 and until the retirement age you designated.
The LIS is a “target date” investment option, which means it is a mixture of stocks and bonds. That mixture will automatically adjust the investments each year as you get closer to retirement. This works in tandem with the SURS Secure Income Portfolio (SIP). The SIP a pre-determined portfolio comprised of 50% stocks and 50% bonds used to fund annual withdrawal amounts (set at retirement) with a guarantee of continued income for life if the portfolio is used up before you die.
The LIS and the SIP are designed to work together as part of your retirement strategy. The purpose for the gradual shift of RSP funds into the SIP portfolio is to average into the withdrawal rates. Each time you move funds into the SIP, those funds are locked into that year’s current withdrawal rate, which is based on prevailing market interest rates at the time of contribution. These rates impact your guaranteed monthly income in retirement: higher interest rates result in higher withdrawals, and lower rates result in lower withdrawals.
When you retire, to qualify for retiree health insurance benefits using this path, there are steps you must follow:
Step 1:
All of your RSP investment funds that are not annuitized must first be moved into the Lifetime Income Strategy (LIS) portfolio.
Step 2:
Once your funds are in the LIS, you must move at least 50% of your LIS balance into the Secure Income Portfolio (SIP). This step is required to activate the guaranteed lifetime income benefit.
Step 3:
By transferring funds into the SIP, you are annuitizing those funds. The SIP provides a guaranteed monthly income for life, even if the SIP balance is depleted over time.
Step 4:
Any LIS funds that are not moved into the SIP can be either:
Transferred back into the RSP Core Funds, or
Withdrawn as a lump sum or partial withdrawals as permitted by plan rules.
Step 5:
Your monthly income from the SIP will depend on two factors:
The total amount you moved into the SIP
Your Lifetime Blended Withdrawal Rate (which is determined by market interest rates at the time of each contribution to the SIP)
How is the Lifetime Blended Withdrawal Rate Calculated?
This is an overly simplified formula, but to illustrate the basics: your Lifetime Blended Withdrawal Rate is determined by averaging the withdrawal rates of each year that you contribute.
Imagine you contributed $100,000 to the SIP (by transferring $100,000 of your LIS balance into the SIP) for each of the three years leading up to your retirement. For each transfer, the interest rate guaranteed for that period was as follows:
In this scenario, interest rates decline over time, reducing the guaranteed withdrawal rate each year. By contributing to the SIP gradually over multiple years, the participant secures an average withdrawal rate of 3.6%. If the same participant had instead waited until year 3 to move their entire balance into the SIP, the final average withdrawal rate would have been just 3.3%. This illustrates the value of averaging in which is a strategy that helps mitigate the risk of waiting until retirement to move funds into the SIP. Although, if the interest rates were reversed, and the rate in year 3 was 4%, the participant would have been better waiting until then to move all $300,000 into the SIP.
The withdrawal rate is heavily influenced by the Federal Funds Rate. If the Fed cuts the rate, the current withdrawal rate will likely be cut. On the other hand, if the Fed raises rates, the current withdrawal rate will likely increase. Averaging into this rate can be a great risk mitigation strategy since whether the rate goes up or down is entirely out of your control. Waiting for a “good” year to capitalize on a high rate is a dangerous strategy as there is no guarantee where rates will be as you approach retirement.
However, strategy of averaging-in comes with trade-offs. While it protects against falling interest rates, it increases costs, as a larger portion of your RSP balance is invested in the higher-cost SIP portfolio. The LIS does not provide any guaranteed retirement income, but its investment fees range from 0.09% to 0.17%. In contrast, the SIP will guarantee income in retirement, but it carries fees of 1.17% (SURS, 2025). It is important to understand investment fees since they can be a drag on the growth of your portfolio. For example, if the SIP investments grew by 8% in one year, and you pay the 1.17% investment fee, the actual growth of your SIP holdings is only 6.83% (8% return, minus the 1.17% fee). If the SIP is going to be your primary source of income in retirement, it is imperative that you understand how much it would cost you over the long run and thoroughly evaluate your other options to understand what you are saying “no” to.
How does the guarantee of lifetime income work?
The income guarantees provided under the Secure Income Portfolio (SIP) are not a new concept, they have been around the insurance and annuity industry for a while. This type of arrangement is traditionally known as a Guaranteed Lifetime Withdrawal Benefit. Under this guaranteed benefit, you are guaranteed the ability to withdraw a fixed percentage of your account balance each year for life.
Each year on your birthday, if your account balance has grown, your guaranteed annual income will increase accordingly. If your balance has decreased, your income remains unchanged. So, your guaranteed income can go up, but it can never drop below the highest level it has previously reached, a feature commonly referred to in the industry as a "high-water mark."
While this sounds appealing in theory, it's important to understand what exactly the insurance company is guaranteeing. The insurer promises to continue paying the same annual income for the rest of your life only if your account is depleted. In other words, you spend down your SIP funds first and the insurance benefit only activates if you outlive your account balance, at which point the insurance company steps in to continue those payments for life. There is no guarantee that any principal remains in your account at death, or that the insurance company pays anything out of pocket.
Here are a couple of examples to illustrate how this mechanic works. These examples are simplified in order to keep the focus on the guaranteed withdrawal benefit. Our next article will add more nuanced examples as we further break down the SIP option.
Example 1
Steve, a University of Illinois employee enrolled in the SURS RSP, retires at age 65 and dies at age 95. He has an account balance of $500,000 and a 4% Lifetime Blended Withdrawal Rate at retirement. He is entitled to $20,000 per year in guaranteed income ($500,000 x 4%). However, due to annual withdrawals and poor market performance, his account balance is depleted by age 90. At this point, the insurance company steps in to continue his $20,000 annual income until his death at age 95. In exchange for a higher insurance cost (the 1.17% annual fee), Steve received 5 years of income paid by the insurance company after his portfolio was depleted. No balance remains in the account for his beneficiaries.
Example 2
Using the same facts as Example 1, Steve retires with a $500,000 portfolio, a 4% withdrawal rate, and receives $20,000 per year in guaranteed income. However, in this scenario, market performance is stronger, and at his death at age 95, $40,000 remains in his account.
The decline in his account value, from $500,000 to $40,000, reflects the funds used to cover his annual payments of $20,000. In this case, the insurance company never pays a benefit, even though Steve paid insurance fees (1.17% every year). His income stream was fully supported by his own contributions and investment returns. Steve’s heirs would receive the remaining $40,000.
Conclusion
This was Part 1 of our multi-part series designed specifically for members of the State Universities Retirement System Retirement Savings Plan (SURS RSP). We have just reviewed the mechanics of the SIP and how it works. Part 2 of our guide will explore the pros and cons of the SIP and will help you answer the question: Is the SIP right for me?
The SURS RSP is a complicated retirement system to understand since there are so many options that are given to participants. By the end of this series, you’ll understand the 3 paths for your account balance and have the confidence and clarity to make a decision that is best for you.
If you or someone you know have questions about retiring under the SURS system, understanding the SURS Retirement Savings Plan (RSP), or navigating retiree health insurance options, we are here to help. It would be our privilege to bring clarity and confidence to your decisions. Schedule a call with us today to get started!
*All figures and calculations are purely hypothetical, and simplified, to illustrate the high-level concepts of the LIS. No part of this article is meant to be construed as personal investment or retirement advice.
Bibliography
SURS. (2025, July 10). SURS Investment Options. Retrieved from Investment Options: https://surs.org/wp-content/uploads/SURS-Investment-Options-Guide.pdf
Co-Authored by:
Jacob Kuebler, CFP®, EA
Timothy Lee, CFP®