[V076] Late-Career Series: How Much Pre-Retirement Income Does a Mississippi PERS Retiree Need?
Transcript
Introduction to Retirement Income Rules of Thumb for Mississippi Public Employees (PERS)
When preparing for retirement, one of the biggest questions Mississippi public employees ask is, “How much of my working income do I actually need in retirement to maintain my current lifestyle?” If you Google or ask AI that question, the common response suggests setting a goal of replacing 70% to 80% of your pre-retirement income. But how accurate is that for Mississippi PERS retirees in practice?
Well, I decided to do significant research and modeling around this topic to provide Mississippi public employees a better and more comprehensive answer. What I found is that depending on your retirement contributions while working, your tax filing status, health insurance choices, and age, your target replacement rate could either be, well within, or much higher than, the general recommended range of 70% to 80%.
What to Expect in This Video
By the end of this video, you will understand every major cash flow line item that decreases, stays the same, or increases when you retire as a Mississippi public employee, both before and after age 65. And be sure to watch until the end where I will share my own rules of thumb for Mississippi PERS retirees based on my research and modeling.
How to Get in Touch for Personalized Retirement Planning
As you watch this video, keep in mind that these figures are for illustrative and educational purposes only and are not to be used as personalized tax, legal, or financial advice. However, I am a vested PERS member and financial planner that specializes in retirement planning for Mississippi public employees. If you want to explore your own personalized estimate of what percentage of working income you will need in retirement, you can start the conversation with me by using the link in the show notes below.
Categorizing Cash Outflows in Retirement for Mississippi PERS Retirees
To help review the changes in cash flows in retirement, I've broken down the cash outflows into four distinct categories:
Outflows that increase in retirement,
Outflows that decrease in retirement,
Outflows that vary in retirement, and
Outflows that stay flat initially but eventually decrease in retirement.
Expenses That Increase in Retirement: Health Insurance
Let's start by looking at the cash outflows that increase in retirement. Health insurance is the primary outflow that increases in retirement. While actively working, the state of Mississippi heavily subsidizes your health insurance coverage if you enroll in the state and school employee plan. Active employees pay as little as $0 to $53 per month for employee-only coverage, with rates determined by whether you are a legacy or horizon employee and whether you enroll in base or select coverage.
Upon retiring and while under age 65, if you elect to enroll in the state retiree health plan, the state subsidy disappears and you will be responsible for 100% of the health insurance premiums. These costs can range from $590 to $975 per month for single coverage, with rates determined by whether you are a legacy or horizon employee and whether you enroll in base or select coverage.
Expressed as a percentage of working gross income, healthcare premiums increase from near 0% while working, up to 1% for higher income retirees under 65. And from near 0% while working, to 14% for lower income retirees under 65.
After reaching age 65, you transition off the retiree state plan into Medicare Parts A, B, and D plus a secondary or supplemental policy. At baseline income levels, this Medicare and supplemental coverage ranges from $451 to $568 per month. However, for higher earners, defined as single retirees with more than $109,000 of modified adjusted gross income or married retirees with more than $218,000 of modified adjusted gross income, federal IRMAA surcharges kick in on Medicare Part B and Part D premiums, pushing your total monthly health insurance costs up to $1,276 per month per person.
Expressed as a percentage of working gross income, healthcare premiums increase from near 0% while working, to up to 3% for higher income retirees over 65. And from near 0% while working, to 13% for lower income retirees over 65.
So overall, for higher income retirees, their health insurance costs will increase slightly upon retirement and significantly once they reach age 65, while for lower-income retirees, their health insurance will increase significantly upon retirement and then decrease slightly or stay the same once they reach age 65.
Expenses That Decrease in Retirement: PERS, 457(b), 403(b), HSA, FICA, and Mississippi Income Taxes
Next, let's look at cash outflows that decrease in retirement, of which there are many. While working, a large percentage of your gross income goes towards mandatory retirement accounts, mandatory taxes, and voluntary tax-deferred accounts.
Let's review each of these individually, starting with the first row:
PERS pension contributions: While working, you pay a mandatory 9% on covered wages up to the IRS compensation limit, which for 2026 is $360,000. However, upon retiring, this mandatory contribution stops, saving you 9% of your wages.
Moving to the next row, deferred comp 457(b) and tax-sheltered annuity 403(b) contributions: Working employees can save up to $24,500 per year in deferred comp 457(b) plans and another $24,500 in 403(b) plans in 2026. In addition, there are special catch-ups for those over 50, for those with 15 plus years of service, and for those within three years of normal retirement age. However, upon retiring, these voluntary contributions stop, saving you whatever you were previously contributing.
Moving to the next row, health savings account contributions: active employees with eligible high deductible health insurance plans can contribute up to $4,400 for single coverage or $8,750 for family coverage, plus for those age 55 or older, an additional $1,000 catch-up in 2026. However, upon retiring, this voluntary contribution stops, saving you whatever you were previously contributing.
Moving to the next row, federal payroll taxes: While working, wages are subject to a 6.2% Social Security tax on covered wages up to the 2026 wage base limit of $184,500. Wages while working are also subject to a 1.45% Medicare tax on all wages, plus an additional 0.9% Medicare tax on wages above $200,000 for single filers or $250,000 for married filers. However, upon retiring, these mandatory federal payroll taxes stop, saving you between 7.65% and 8.55% of wages.
Moving to the next row, Mississippi state income tax: While working, Mississippi taxable income above $10,000 for single filers and above $20,000 for married filers is taxed at a flat 4% rate in 2026. However, upon retiring, all qualified retirement income is 100% exempt from Mississippi state income tax if plan retirement requirements are met, saving you up to 4% of excess taxable income.
Looking at the totals row, active Mississippi public employees routinely lose between 20 to 35% of their gross income to these five items while working. Having these expenses fall to zero in retirement provides a lot of relief and more than offsets the rising health insurance costs discussed earlier.
Expenses That Vary in Retirement: Federal Income Taxes
Now let's look at the cash outflows that vary in retirement. Federal income tax is the primary expense that generally stays relatively consistent or varies slightly during retirement. Federal income taxes follow progressive tax brackets ranging from 10% to 37% of taxable income, though due to available deductions and credits, the actual rates paid as a percentage of your working income will be lower than these marginal rates.
While working, your taxable income is reduced by pre-tax contributions to PERS, deferred comp 403(b), and HSAs. In retirement, your pension and other tax deferred retirement income becomes fully taxable, meaning there's a decent chance your federal income taxes will actually increase slightly in early retirement while under age 65. After age 65, there are additional deductions available for seniors subject to income limitations, which help offset taxable income for lower and middle income retirees.
Looking at the totals row, total federal income taxes as a percentage of working income stays relatively stable or varies by a percentage point or two throughout retirement.
Expenses That Eventually Decrease in Retirement: Local Property Taxes and Debt Payments
Finally, let's look at the cash outflows that initially stay the same but eventually decrease in retirement.
Let's start with the first row: local real estate property taxes: Before age 65, retirees pay local ad valorem property taxes on their homes and can claim the standard Mississippi Homestead Exemption Credit, which caps out at $300. Assuming home values are roughly two and a half to three times income, and assuming millage rates are 75 to 150 mills, approximately 2% to 3% of working income will go towards local property taxes while working and under age 65. However, once you turn 65, Mississippi provides a special age homestead exemption. This exempts the first $75,000 of true home value or $7,500 of assessed value from ad valorem taxes, reducing your local real estate taxes by approximately $500 to $1,000 per year, depending on local millage rate.
Moving to the next row: debt service payments: While working, most households will have regular monthly debt payments they make toward mortgages, vehicle loans, college loans, and other consumer debt. These debt payments will be approximately 20 to 40% of working income. In early retirement, retirees typically will pay off their own and or their children's college loans, reducing the percentage of working income going toward debt payments by 10% or more. As retirees reach their late 60s and early 70s, primary mortgages will be paid off. As retirees reach their late 70s and early 80s, car loans will also mature and oftentimes the car will not be replaced at that time. By the time a retiree is in their 80s, the percentage of working income going towards debt nears zero.
Looking at the totals row, active Mississippi public employees routinely lose approximately 23% to 43% of their gross income to these two items. Having these expenses fall late in retirement provides a lot of relief and helps offset long-term care costs that begin showing up around the same time.
General Rules of Thumb vs. Practical Rules of Thumb
Now let's combine these four cash outflow tables into practical rules of thumb you can use to estimate your target retirement income. After researching and modeling detailed cash flows across 20 scenarios for single and married PERS retirees for households with incomes ranging from $50,000 all the way up to $500,000, here's what I found:
Overall, Mississippi PERS retirees can expect their baseline required gross income in retirement to fall between 74% and 92% of their pre-retirement working wages to maintain 100% of their working lifestyle.
For single PERS retirees under 65, they should expect to need 74% to 83% of their pre-retirement working wages to maintain their lifestyle.
For single PERS retirees over 65, they should expect to need 74% to 79% of their pre-retirement working wages to maintain their lifestyle.
For married PERS retirees under 65, they should expect to need 77% to 92% of their pre-retirement working wages to maintain their lifestyle.
And for married PERS retirees over 65, they should expect to need 76% to 87% of their pre-retirement working wages to maintain their lifestyle.
Commentary on My Rules of Thumb
Three key points I want to make about these ranges.
First, the standard 70% to 80% rule of thumb is both inaccurate and too narrow as a general rule of thumb for PERS retirees. My general rule of thumb would be 75% to 90%, excluding debt service and lifestyle considerations.
Second, make sure to account for lifestyle expansion in early retirement. Younger, healthier PERS retirees should build in extra discretionary income for travel, dining, hobbies, and home projects during their active go-go years.
Third, although cash is king, debt payoff can provide further flexibility to a PERS retiree. Eliminating a primary mortgage before or during retirement frees up significant cash flow, offsetting early go-go lifestyle expenses and offsetting late no-go long-term care expenses.
Action Items for Mississippi Public Employees
If you are trying to determine what percentage of pre-retirement income you should target for your retirement, here are your action items for today.
Audit your current pay stub. Add up your mandatory PERS contribution, optional deferred comp and HSA contributions, FICA taxes, and Mississippi State income tax withholding. This will provide you an approximate amount of income you will no longer need to replace in retirement.
Estimate your pre-65 versus post-65 health premiums. Compare your subsidized employee rate against the current unsubsidized state retiree health plan rate and against the current Medicare rates for your zip code to get an idea of how your premiums may change in retirement.
Identify the cushion you have or need. Decide if you need an additional 5% to 15% spending cushion for your go-go years and or if you can offset 10% to 20% of current spending by using cash flow freed up from paid off debt.
Preview of Next Video and Closing Remarks
I hope this video gives you a better rule of thumb for what range of pre-retirement income you should target as a PERS retiree to maintain your current lifestyle. In our next video, we will move beyond rules of thumb and go a little deeper to answer “What percentage of pre-retirement income does a single PERS retiree need to sustain their working lifestyle given a particular household income?”
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 Mississippi public employees.
And finally, if you're looking for a financial planner who specializes in helping Mississippi public employees build comprehensive retirement strategies, including modeling retirement income targets, 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.
