Your can raise your pension!
Learn how to maximize the percent of income you will receive in retirement. In my previous post I explained how to find your percent of salary using a look up table or by multiplying your age factor and years of service. You need that number to start today.
I will use my personal numbers as examples throughout this article. : If I wait seven years, until I am 60 to retire basic number will be 77% of my salary based on a formula of 35 years x (2.0 age factor + 0.2 age bonus).
1. Work Longer to increase service credit.
Nobody said it was easy, but every additional year can be worth 2% or more over the the long haul. While your percent of income will max out, there is no limit to the number of years of credit you can apply to the CalSTRS formula. Just whatever your mortal coil can handle. I know a teacher at my school who is trying to reach forty years!
Another option is to save up sick days. They are added to your service credit as a fraction of your work year. If you have a 180 day work year and 90 sick days they will be converted to an extra half year. If you need to use the days, use them, but they won’t go to waste in the end. And if you are in the 2% at 60 tier you can use a portion of them (.2 of a year) to count towards your 30 year longevity bonus. In that case they are really valuable with the possibility to bump you to a .2 bonus times all of years.
2. Buy Extra Service Credit
You can buy extra service credit that adds on to your years of credited service. CalSTRS has a list of approved reasons you may purchase credit including years substituting, years on an approved leave, or teaching out of country.
First, run the numbers to determine if the purchase will be worth it. It is less expensive to buy the credit when you are younger as it is based on actuarial tables and your final compensation which are both in your favor.
CalSTRS provides a calculator to estimate the cost of purchasing the credit. I looked up the cost to purchase a year of credit for my wife who is nearing the end of her career as well and almost at the top of the salary chart. It costs about $29,000 to buy her a year of credit. Assuming she reaches 30 years of service, that extra year will raise her benefit by 2.4% or in her case $2640 a year (without a beneficiary). She would break even in eleven years on her purchase.
Assuming that she lives longer than eleven years, would it be worth it? Maybe. Investing that $29,000 in the stock market could generate as much as $59,000 over the same time horizon and therefore generate $2300/year for a lifetime of 4% rule withdrawals. Moot points as we don’t have the plan to purchase that much credit.
3. Increase your salary by moving Right on the Salary Scale via Education Creditsd
Final compensation is the term that CalSTRS uses for your income in the pension formulas. Under CalSTRS 2.0 at 62 and for anyone under 25 years of service they use the average of your last 36 months of base salary as your final compensation. If you are a CalSTRS 2.0 at 60 member with 25 years of more of credit they will use your one highest year of compensation.
The above is a great reason to increase your monthly paycheck. More base salary equals a higher pension benefit. The best way to do that is to move to the right on the salary schedule by increasing your education credits. Going back to school to earn an. M.A. or other credits is critical to increase your income and your pension. You will be doing the exact same job, but making more for life. I would not even be too picky about which program you select. Just get it done and make that money.
Caveat: Taking on extra assignments may not increase your main pension benefit. I teach an extra period which increase my take home pay by almost 20%, but this will not increase my final compensation or monthly benefit. Instead the contributions to CalSTRS fund my Supplementary Benefit Account where they grow at 3.5% until retirement where I can receive them as a lump sum or annuity payments.Only my main monthly paycheck factors into out monthly pension benefit. You need to find out how your district funds your retirement accounts.
4. Leave Less or Nothing to your Beneficiaries
Once you reach fifty-five years old with at least five years of service, you can choose a beneficiary structure. You can leave a lifetime benefit to someone or someones after you die. This will reduce your pension based on actuarial tables that factor in your age and the beneficiaries age.
I have colleagues that are designating their children so that they will receive a lifetime benefit. That’s a pretty cool legacy. Their kids will get a monthly check for life! My understanding is that the age of the beneficiary affects the amount. It works like a life insurance benefit.
My wife and I will designate each other at around a 75% benefit because we need that money to support our spending in retirement. The downside is that once both of us die. the benefit will be gone. If one of us predeceases the other, our benefit will serve in effect, as a form of life insurance.
If you choose to take the full pension without a beneficiary or give them a smaller percentage of your benefit, you will receive a larger monthly benefit for yourself to support your spending during retirement. If you end up not using the money in can be invested to leave a legacy. Use the calculator on CalStrs to estimate based on your beneficiary choice.
5.Get a Raise
Unlike other professions our salary increase options are limited if you want to stay with the same employer unless you want to move into administration or work more calendar days as a specialist. Teacher raises arrive after collective bargaining and are accomplished by actively supporting your bargaining unit. Get involved by being a rep for your school or showing up for actions. Everyone benefits when you work together with your union colleagues to support your contract and fight for additional compensation. Pay your dues.
Bonus: Invest Outside of your Pension!
This will give you the most flexibility, but it does mean some conscious decision making in order to get the ball rolling, overcome possible fears around taking the risk, and making sound decisions to avoid fees from inferior investment products. Luckily much has been written on this topic.
An easy first step would be to open up a Roth IRA at Vanguard and choose a target date fund for the year I would turn sixty-five. Everyone has their own needs and circumstances, but this would at least get the party started wit the knowledge that you can switch to a different fund when you research more.
Plan Ahead
Planning ahead is the key to all of these decisions, you can’t change the beneficiary until you are at least 55 years old, but you can work to increase your salary by investing in your education, supporting your union, and buying available service credit while you are earlier in your career. Start playing with the CalStrs calculator to see your options and how they will affect you over time. Email with questions to [email protected]