If you are participating in a pension and want to make the most of it, I’ve outlined a few things you’ll want to consider. Pensions play a significant role in securing your financial stability during the golden years. Whether you’re a teacher, a government employee, or a federal worker, pension plans like STRS (State Teachers Retirement System), PERS (Public Employees Retirement System), or FERS (Federal Employees Retirement System) provide a critical source of income post-employment. Here is what you need to know to maximize your pension.
Understanding Your Pension
The first thing you need to understand to maximize your pension is how your benefit is calculated. There are usually three main components.
- Years of service.
- Age of retirement
- Highest income level.
Let me expand on each of these.
Years of service. Most pensions require you to work at least 5 years to become vested, in other words, qualify for your pension benefits. The more years of service you have, the higher the pension multiplier. I’ll explain more about that later. You can also qualify for longevity bonuses depending on the plan and how long you work. For example, STRS give employees a .2 kicker if you work over 20 years. This allows you to get to your maximum retirement multiplier earlier.
Age of retirement. Like Social Security, you are expected to be a certain age to collect your benefit. This is where the age multiplier comes in. For Safety pension people (Police and Fire), you might hit your maximum age multiplier at 50 or 55 years of age. Most pensioners hit their maximum age multiplier at 63 years of age, unless you have a longevity bonus as mentioned above.
Here’s how it breaks down: 0.024 x 30 = 0.72 The age multiplier (we will call it 2.4 in this example) times the years of service (let’s say 30 years of service) equals the percentage of your income you will receive from your pension (72).
Highest Income Level. Most pensions take an average of your last 3 years of income, or some will take your best year (highest income year) to factor into the calculation. For example, if your income averaged $80,000 over your last 3 years of service, your pension based on the above parameters of 0.72 would equal $57,600 annually. If you can live off that you are ready to retire!!
Tips to Maximize Your Pension.
- Know when you will reach your maximum age multiplier. Be aware of leaving any money on the table by exiting early.
- Spike it! Take that position that pays more in the last few years of your retirement. Don’t leave right before a raise is given as this can significantly change your retirement income.
- Get the longevity bonus if you have them. Time on the job is the major part of the formula.
- You may have a supplemental benefit plan for working overtime or after hours so take those special assignments or field trips with a class, especially early on in your carrier. You want the compounding effect of money in a defined benefit supplemental plan working for you. This can be a nice bonus to you when you retire. If you have a supplemental plan talk to an advisor, like me, before taking the benefit as there are tax consequences you need to be aware of.
- Take advantage of your 403b, 457 or Thrift Savings Plan (TSP). An old mentor of mine used to say, “Your pension will maintain your living in retirement, and your 403b, 457 or TSP will give you lifestyle in retirement.” Your 403b, 457 or TSP gives you options later in life. You can’t call your pension and ask for more money because you need a new roof or want to take your family on a vacation. Make funding these types of plans a priority; you will be glad you did.
- Choosing a survivor benefit. If you want to leave your pension or part of it to your spouse or partner, you can save a lot of money if you plan ahead. When you retire, you will be asked to choose a survivor benefit. This can reduce your benefit by up to 10% annually for the rest of your life. My first question I ask pensioners is do you have a life insurance policy. If you have a good life insurance policy, you can just say no thanks to your pension plans survivor benefit. Basically, you are buying a life insurance policy from your pension plan when you choose a survivor benefit. It’s on the pension’s terms and it is not cheap. A little bit of planning can protect you while you’re working and save you money during your retirement.
In Summary
If you want to maximize your pension, know your multiplier, spike your income if you can, take advantage of bonus and supplemental features, fund your 403b, 457 or TSP, and if you want to provide a survivor benefit, buy a life insurance policy instead. With only a few tweaks to your lifestyle and some planning, your golden years can be truly golden! What to learn more? Read about How I Became an STRS Specialist.
If you need help with or have questions about your pension, please reach out to me at (530) 621-1111 or contact me.
