Chapters

00:00 Introduction to COLA Rates

01:07 Understanding Simple COLA Calculation

02:47 Exploring Compound COLA Calculation

03:54 Comparative Analysis of Simple vs Compound COLA

Transcript

Hey everyone, I'm Ryan Early, host of the PERS Pro YouTube channel. In our last video, we broke down when a PERS retiree transitions from receiving the simple 3% COLA to the compound 3% COLA. Today, we're putting those two rates head to head. You'll see exactly how the simple and compound COLA calculations work, and most importantly, we'll show you the dramatic difference they make to your total benefit over time.

Before we jump into the numbers, make sure you hit that subscribe button so you don't miss any of our future videos. Our goal with this channel is to provide you with short, easy to understand, financial education videos every day that are relevant to PERS members like you.

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 Mississippi Public Employees Retirement System. Always consult directly with a Mississippi PERS representative, a financial advisor, an accountant, and or a legal professional before making any decisions regarding your unique personal situation.

Let's start with the simple COLA rate. For Mississippi PERS retirees, the 3% COLA is calculated as a lump sum payment based on your original annual retirement benefit. In a simple COLA calculation, the increase in the COLA amount is the same every single year. It's a flat rate applied to a flat starting amount. For you math and science teachers out there, the annual COLA amount follows a linear growth model. The annual COLA increase is equal to the original annual base benefit multiplied by 3%. The annual COLA amount in any given year is the annual increase multiplied by the years the retiree has been in the simple phase.

Let's use an example of a PERS retiree receiving a $2,000 monthly base benefit, which equals a $24,000 annual benefit. The annual increase for simple COLA is easy to calculate. We take the $24,000 annual base benefit multiplied by 3%, giving us a $720 increase. It's important to note that during the simple COLA phase, the retiree in our example, he or she will receive the same $720 increase in COLA every year until they reach the compound phase.

Let's look at how the annual COLA amount would look in a simple phase over 5, 10, and 25 years using the same $24,000 annual base benefit amount as our example. Let's look at a PERS retiree who has been in the Simple Phase for 10 years. After 10 years of retirement, that retiree has received 10 separate $720 increases totaling $7,200. That retiree's annual COAL amount in year 10 of the Simple Phase would be $7,200.

Now let's look at the powerful compound COLA rate. Albert Einstein is credited with the famous quote, compound interest is the eighth wonder of the world. In the case of the compound phase, it's a cost of living adjustment on the previously adjusted benefit. Every year the COLA rate is applied to a new higher adjusted benefit amount. Again, for you math and science teachers out there, this creates an exponential growth pattern. During the compound COLA phase, the annual COLA amount is equal to the original annual base benefit multiplied by 1.03 raised to the number of years eligible for the compound rate minus one.

Once I start introducing exponents into formulas, I know I lose 99 % of you out there. So using our $24,000 annual benefit, let's see how this snowball effect accelerates over time with a simple table for our example. The key difference here is that the $720 increase in the simple calculation is fixed, but with compounding, the actual annual COLA increase gets larger every single year.

The most important takeaway is how these two different formulas translate into dollars and cents in your retirement. This is the difference between linear and exponential growth. Let's take a look at another table comparing simple versus compound at 5, 10, and 25 years of retirement. The second column shows the COLA amount at years 5, 10, and 25 for a retiree receiving simple COLA rate. The third column shows the COLA amount for a retiree receiving compound COLA rate. The fourth and last column shows the compound comparative advantage. Now look at the 25 year mark. In year 25, the retiree receiving the compound COLA has a COLA amount that is over $8,200 higher than the retiree receiving the simple COLA.

For PERS retirees, your COLA combines both simple and compounded factors based on your age and tier. But this comparison illustrates why the compounded phase of your COLA is so crucial for long-term financial security. If you need a refresher on when Mississippi PERS retirees are eligible for that compound phase, please watch our previous episode.

Understanding the difference between simple and compound growth is a massive step toward gaining financial clarity with your Mississippi PERS COLA benefit. Be sure to watch our next video where we'll get even more granular and show you exactly how to combine your simple and compound phases to calculate your actual COLA lump sum payment in any given year.

If you have a follow-up question about COLA, PERS, or anything else related to personal finance that impacts PERS members, please visit our website at perspro.ms and submit your question for a future episode. If you found this video helpful, you can thank me by liking the video and sharing it with other PERS members. Thank you for your valuable public service to the state of Mississippi. We'll see you next time.