[V073] Late-Career Series: How Much Income Will Mississippi Deferred Comp Generate in Retirement?
TRANSCRIPT
Introduction
If you are a Mississippi public employee preparing for retirement, understanding how your deferred compensation 457 account translates into monthly retirement income is critical to retirement planning.
By the end of this video, you will have an idea of how much monthly and annual income your deferred comp balance can generate, whether you retire from PERS at age 50, 55, 60, or 65, whether you need your account to bridge the gap until Social Security at age 62, 65, or 70, or whether you need your deferred comp account to supply steady supplemental income for life through age 85.
As you watch this video, keep in mind that these figures are for illustrative purposes only and are not to be used as personalized financial advice. However, I'm a financial planner by day, so if you want to explore your own personalized retirement projections based on your unique circumstances, including PERS, deferred comp, and social security income, you can start the conversation with me by scheduling an introduction using the link in the show notes below.
High-Level Overview of Deferred Comp Income Mechanics
Before I get into the numbers, let's start with a basic understanding of how retirement income generated from your deferred comp account changes as account balances, payout durations, investment returns, and inflation rates change.
Monthly income increases as account balance at retirement increases, all else being equal.
Monthly income increases as the withdrawal period shortens, all else being equal.
Monthly income increases as investment returns increase, all else being equal.
And monthly purchasing power increases as inflation decreases, all else being equal.
Key Assumptions & Methodology
Now that we have a basic understanding of the variables that impact the monthly income you can generate from your deferred comp account, we can move on to modeling assumptions.
To best evaluate your hypothetical deferred comp retirement income potential, we wanted to use as much real-world assumptions as possible.
First, investment option. We assume that the PERS retiree was invested 100% in the Vanguard Target Retirement Income Fund, ticker VTINX, throughout the entire withdrawal period. This fund is one of the options available to PERS retirees that participate in the Mississippi Government Employees Deferred Compensation Plan and Trust. This fund seeks to provide current income and some capital appreciation and is roughly invested in 70% bonds and 30% stocks across both U.S. and foreign securities.
Nominal return. We assume that the PERS retiree would experience a 5.5% nominal return before accounting for inflation for the duration of the withdrawal period. This assumption was based on the 10-year total returns for calendar years 2016 through 2025 for the Target Retirement Income Composite Index, which is the index that the Vanguard Target Retirement Income Fund is benchmarked against in its own prospectus.
Inflation rate. We assume that the PERS retiree would experience a 2.5% inflation rate for the duration of the withdrawal period. This assumption was based on the average annual inflation rate based on the consumer price index over periods of 10, 20, and 30 years.
Real returns. We assume that the PERS retiree would experience a 3% real return for the duration of the withdrawal period. The real return is a better reflection of the purchasing power the PERS retiree has after adjusting for inflation.
Withdrawal timing. We assume that the PERS retiree would make withdrawals from their deferred comp account on a monthly basis at the beginning of every month. We also assume that the withdrawals would begin immediately after PERS retirement.
Very important disclaimer: these assumptions and the calculations that follow are for illustrative purposes only, and past performance does not guarantee future results.
Social Security Bridge Strategy - Claiming at Age 62 (Bridge Through Age 61)
With the assumptions out of the way, let's look at our first scenario, a PERS retiree plans to claim Social Security early at age 62 and needs their deferred comp account to supply them monthly income through age 61.
The first column of this table lists the PERS retiree's deferred comp balance in $100,000 increments. The second, third, and fourth column show the monthly and annual income that a given deferred comp account balance would generate over a period of 12, 7, and 2 years until the PERS retiree turns 62.
Let's look at an example for an individual that has a $200,000 balance in their deferred comp account at PERS retirement.
Following along in the table, the $200,000 would generate $1,606 per month or $19,269 per year if that individual retired from PERS at age 50 and made monthly withdrawals until they turned 62.
That same $200,000 would generate $2,592 per month or $31,109 per year if that individual waited to retire from PERS at age 55 and made monthly withdrawals until they turned 62.
And finally, that $200,000 would generate $8,534 per month, or $102,412 per year if that individual waited to retire from PERS at age 60 and made monthly withdrawals until they turned 62.
You probably noticed how monthly and annual income grow linearly as deferred comp balances increase. Meaning, if you double the deferred comp balance, you double the income in a given column shown in the table.
However, you may not have noticed though how monthly and annual income grow exponentially as retirement age moves closer to age 62, meaning if you cut the withdrawal period from 12 years to seven years, that is a 42% reduction in the number of months you will be making withdrawals, however, it is a 61% increase in monthly income.
If you want to see more results, including deferred comp balances in $25,000 increments, from $25,000 to $500,000, as well as yearly increments in PERS retirement ages from age 50 through age 61 for someone that will be making withdrawals from their deferred comp account through age 61, you can check out my blog post, which I will include in the show notes below.
Social Security Bridge Strategy – Claiming at Age 65 (Bridge Through Age 64)
Next, let's examine the numbers for a retiree who plans to claim Social Security at age 65 and needs monthly deferred comp income through age 64.
Following along in the table, $200,000 would generate $1,331 per month or $15,970 per year if that individual retired from PERS at age 50 and made monthly withdrawals until they turned 65.That same $200,000 would generate $1,881 per month or $22,578 per year if that individual waited to retire from PERS at age 55 and made monthly withdrawals until they turned 65.
And finally, that $200,000 would generate $3,542 per month or $42,505 per year if that individual waited to retire from PERS at age 60 and made monthly withdrawals until they turn 65.
If you want to see more results for this scenario, you can check out my blog post in the show notes below.
Social Security Bridge Strategy – Claiming at Age 70 (Bridge Through Age 69)
Next, let's review the figures for a retiree delaying Social Security to age 70 to maximize delayed retirement credits, drawing deferred comp through age 69.
Following along in the table, $200,000 would generate $1,058 per month or $12,691 per year if that individual retired from PERS at age 50 and made monthly withdrawals until they turned 70.
That same $200,000 would generate $1,331 per month, or $15,970 per year if that individual waited to retire from PERS at age 55 and made monthly withdrawals until they turned 70.
That $200,000 would generate $1,881 per month or $22,578 per year if that individual waited to retire from PERS at age 60 and made monthly withdrawals until they turn 70.
And finally, that $200,000 would generate $3,542 per month or $42,505 per year if that individual waited to retire from PERS at age 65 and made monthly withdrawals until they turn 70.
If you want to see more results for this scenario, you can check out my blog post in the show notes below.
Lifetime Income Strategy – Sustaining Income Through Age 85
Finally, let's analyze a retiree who does not want to exhaust deferred comp early in retirement as a Social Security bridge, but instead wants steady supplemental income for life, assuming they live through the age of 85.
Following along in the table, $200,000 would generate $714 per month or $8,562 per year if that individual retired from PERS at age 50 and made monthly withdrawals through age 85.
That same $200,000 would generate $789 per month or $9,463 per year if that individual waited to retire from PERS at age 55 and made monthly withdrawals through age 85.
That $200,000 would generate $895 per month or $10,744 per year if that individual waited to retire from PERS at age 60 and made monthly withdrawals through age 85.
And finally, that $200,000 would generate $1,058 per month or $12,691 per year if that individual waited to retire from PERS at age 65 and made monthly withdrawals through age 85.
If you want to see more results for this scenario, again you can check out my blog post in the show notes.
Action Items for Viewers
If you are a Mississippi PERS member evaluating how your deferred comp account fits into your overall retirement income strategy, here are your action items for today.
Give your deferred comp a role. Decide whether your deferred comp account will serve primarily as a bridge taking larger withdrawals over a shorter period of time, or as a lifelong supplement alongside your PERS pension and Social Security payments.
Coordinate retirement income. Coordinate your deferred comp withdrawals with your PERS pension and Social Security payments to determine the amount needed on a monthly basis for the duration that you need it.
Set your assumptions. Estimating what your investment returns and inflation rate will be will help you set a goal for what your deferred comp balance needs to be at PERS retirement. The reverse is also true. Estimating what your deferred comp balance will be will help you set a goal for what your investment returns will need to be at retirement.
Preview of Next Video and Closing Remarks
I hope this video gives you a better understanding of how much monthly income your deferred comp account can generate in retirement. In our next video, we will explore how much will taxes increase or decrease for a PERS retiree in retirement.
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, you can thank me by hitting the thumbs up button and sharing it with other PERS members.
And finally, if you're looking for a financial planner that specializes in helping Mississippi PERS members build tax-efficient retirement strategies, including optimizing deferred comp drawdowns, 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.
