Transcript

Introduction to PERS and Social Security Retirement Modeling

Hi everyone, I'm Ryan Earley, vested PERS member, current financial planning firm owner, and host of the PERS Pro YouTube channel.

In our last video, we looked at how much working one additional year increases your monthly PERS and Social Security retirement income. However, if you wanted to know which of PERS or Social Security will provide more of your retirement income, or the number of years you must work for PERS and Social Security to replace your current salary, then today's video is for you.

Let's get started.

Assumptions Used in the Retirement Income Model

To analyze at a high level how fixed income from PERS and Social Security shifts depending on an individual situation, we modeled retirement income data for both PERS and Social Security across various salaries ranging from $50,000 to $500,000, across various years of service, ranging from 25 to 40 years, and across various Social Security claiming ages, ranging from age 62 to 70.

Before we get into the results, it's important that I outline the assumptions used in our model. 

First, we assume the PERS member was hired before July 1st, 2011, making them either a Tier 1, Tier 2, or Tier 3 PERS member, and that they will select the maximum retirement allowance option upon retirement. 

Second, we assume the salary at the end of the PERS member's career represents both the highest four average compensation for PERS purposes and the annualized average indexed monthly earnings, or AIME, for Social Security purposes. 

For PERS, average compensation was capped at $330,000, which was the internal revenue code limit in 2023, and this allowed me to backcheck my numbers directly against the PERS online calculator. 

For Social Security, the maximum average index monthly earnings was estimated to be $12,000 and this applied for someone who has earned maximum earnings since age 22. 

The Social Security bend points are assumed to follow the 2026 bend points of $1,286 and $7,749 at rates of 90%, 32%, and 15% respectively. 

Finally, the PERS member is assumed to have been born in or after 1960, establishing a full retirement age of 67.

Breakdown of PERS and Social Security Fixed Income When Claiming at Full Retirement Age

Now that we got the assumptions out of the way, let's first look at the breakdown of the fixed retirement income when claiming Social Security at full retirement age, age 67. 

This table shows salary down the first column with total income and percentage of income coming from PERS versus Social Security at 25, 30, and 35 years of service for a given salary level. It also shows in the last column the magic service milestone where total fixed retirement income surpasses pre-retirement salary when you plan to claim Social Security at full retirement age. 

At a $50,000 salary, your combined income from your PERS and Social Security retirement benefits exceeds your working salary at 28 years of service. At $100,000, it surpasses salary at 31 years. At $150,000, it takes $33 years. At $200,000, it takes 36 years, at $250,000, it takes 38 years, and at $300,000, it takes 39 years. 

Because PERS compensation caps out at $330,000 in our model, salaries at $350,000 and above do not surpass pre-retirement salary within 40 years.  And keep in mind that these magic service milestones are ignoring variable retirement income from other sources you may have access to, like deferred compensation, tax-sheltered annuity accounts, individual retirement accounts, either your own or inherited, and brokerage accounts. 

The other two trends I want to point out in this table are: First, the percentage of fixed income coming from PERS increases as your years of service increase. Second, the percentage coming from PERS increases as your salary increases, but only up to a point.

Because Social Security benefits are progressive and cap out much earlier than PERS, PERS makes up 55% of fixed income at $50,000 salary and 25 years of service, as shown in the top left of the table, but climbs to 84% of fixed income at over $350,000 salary and 35 years of service, as shown in the bottom right of the table.

Breakdown of PERS and Social Security Fixed Income When Claiming Early at Age 62

Next, let's look at the breakdown when claiming Social Security early at age 62. When claiming early at age 62, the reduced Social Security benefits extend the years of service required to surpass pre-retirement salary compared to when claiming at full retirement age. 

At a $50,000 salary, it now requires 32 years of service versus 28 years at full retirement age. At $100,000, it requires 34 years versus 31 at full retirement age. At $150,000, it requires 37 years versus 34 at full retirement age. At $200,000, it requires 39 years versus 36 years at full retirement age. And at $250,000, it requires 40 years versus 38 years at full retirement age. Salaries of $300,000 and above no longer surpass working income within 40 years. 

Just as we saw with claiming at full retirement age, the percentage coming from PERS increases as your years of service increase and as salary increases up to a point. 

However, because Social Security benefits are permanently reduced by 30% when claiming early at age 62, the percentage of total fixed income coming from your PERS pension at any given salary and years of service is noticeably higher when claiming early at age 62 than when claiming at full retirement age. For instance, at $100,000 in 30 years of service, PERS pension accounts for 71% of your fixed retirement income compared to just 63% when claiming at age 67.

Keep in mind also, as you look at the numbers in the table, that the total income number rarely will match what you see at age 62 unless you retire from PERS and claim Social Security at the same time. 

For example, if you retire from PERS at age 58, your PERS benefit will experience compound COLA growth until age 62, meaning your PERS benefit plus your Social Security benefit will actually be higher than the number shown in the table at age 62.  The downside though is that you will need to be able to generate retirement income from other sources to support yourself from age 58 to age 62.

Breakdown of PERS and Social Security Fixed Income When Delaying Claiming Until Age 70

Finally, let's look at the breakdown when delaying claiming Social Security until age 70. 

Delaying Social Security to age 70 significantly accelerates how quickly your total fixed income surpasses your pre-retirement salary. 

A PERS member earning $50,000 surpasses their working salary right at 25 years of service versus 28 years at full retirement age. At $100,000, it takes 28 years versus 31 at full retirement age.  At $150,000, it takes 31 years versus 33 years at full retirement age. At $200,000, it takes 34 years versus 36 at full retirement age. At $250,000, it takes 36 years versus 38 years at full retirement age. At $300,000, it takes 38 years versus 39 years at full retirement age. Salaries of $350,000 and above no longer surpass working income within 40 years.

Similar to claiming Social Security at 67 or 62, the percentage coming from PERS increases with additional years of service in higher compensation up to the PERS cap. 

However, because delaying claiming Social Security until age 70 increases Social Security benefits by 24%, the percentage of total fixed income coming from PERS at any given salary and years of service is lower than when claiming at full retirement age.  For example, at $100,000 and 30 years of service, PERS makes up only 58% of fixed income when claiming Social Security at 70, compared to 63% when claiming at 67%.

The Power of Working 25 Years and Delaying Claiming Until Age 70 for Someone Making $50,000

The most incredible thing to me about this table, maybe the entire model, is that you could have someone who didn't save a dollar for retirement until they are 45, who then finds a job with a PERS employer, works for 25 years until the age of 70, at which point they are making $50,000 and retire from PERS and begin claiming Social Security, then that person will have 100% of their salary covered by government-backed fixed income adjusted for inflation for life.

That's such a powerful concept that I want to make sure I get across to any viewer who may feel like they'll never be able to comfortably retire.

How to Access All 480 Retirement Income Scenarios

If you want to see all 480 retirement income combinations from the model for individual years of service from 25 through 40 at all salary levels in $50,000 increments, ranging from $50,000 to $500,000, and for various ages at which you plan to claim Social Security, including $62, 67, and 70, you can check out our blog, which I will link to in the show notes below.

Action items for Late-career PERS Members

If you are a late career Mississippi PERS member planning your retirement, here are your action items for today. 

One, determine your primary income driver. Compare your current salary against our model results to determine roughly how much of your fixed retirement income will come from state sources versus federal sources. 

Two, identify your magic service milestone. Use your salary to estimate the age and years of service where your fixed retirement income will match or exceed your pre-retirement salary. 

Three, identify any additional savings needs. Evaluate how claiming Social Security at 62, 67, or 70 may drive a need for additional savings outside of PERS and Social Security to get from your PERS retirement age to your Social Security claiming age.

Preview of Next Video and Closing Remarks

I hope this video gives you a better idea of what your fixed income coming from PERS and Social Security will look like in retirement and at how many years of service it will take for your fixed retirement income coming from PERS and Social Security to surpass your working salary. 

In our next video, we will explore how much will a promotion late in your career affect your PERS and Social Security retirement income for the rest of your life. Please make sure you subscribe so you don't miss this and other upcoming videos in our late career series. 

If you found this video helpful, please hit the thumbs up button and share it with your fellow colleagues.  

And finally, if you're looking for a financial planner that specializes in helping Mississippi PERS members build tax efficient retirement strategies, including coordinating PERS pension and Social Security benefits, please visit our website at perspro.ms to learn more about how we help PERS members like you. 

Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Legal Disclaimer

Disclaimer: This video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal advice specific to your situation.