Chapters

00:00 Introduction to COLA and PERS

01:18 Understanding the Simple COLA Phase

03:33 Transitioning to the Compound COLA Phase

06:02 Combining Simple and Compound COLA

06:52 Key Takeaways and Resources

Transcript

Hi I'm Ryan Early, host of the PerksPro YouTube channel. In our last two videos, we first broke down the eligibility rules for the 3% COLA, and then we put the simple and compound COLA formulas head to head to show the dramatic difference over time. Today, we're bringing it all together. This is the ultimate how-to guide. We're going to use a real-world example to show you exactly how to combine the simple and compounded phases to calculate your total Mississippi PERS COLA amount in any year of your retirement. Let's get started.

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 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 affiliated with, endorsed by, or sponsored by the Mississippi Public Employees Retirement System. Always consult the official PERS retiree handbook or qualified financial personalized advice.

For PERS retirees, the annual COLA is a fixed 3% adjustment. The trick however to calculating it is knowing when that 3% is calculated using the simple formula versus the compound formula. To illustrate the COLA calculation process, today, we are going to use a specific example throughout this video.

Our hypothetical retiree was a Tier 2 PERS member that retired early at the age of 52 with a full 30 years of service. Because they are a Tier 2 member, their compounding COLA benefit will begin the fiscal year they turn age 55. Their initial annual base benefit is assumed to be $36,000 in our example.

For our retiree, the COLA is calculated using the simple rate until they reach age 55. The simple rate means the 3% is always applied to the initial annual benefit of $36,000 when computing the annual COLA increase during the simple interest phase. Applying the 3% against the initial base benefit of $36,000 gives us an annual increase of $1,080. This retiree will receive an annual COLA increase of $1,080 for every full fiscal year of retirement until they turn age 55.

Remember, a PERS retiree must have received retirement benefits one full fiscal year before they are eligible to receive their first COLA payment. Since our retiree retired at age 52, they will not be eligible to receive a COLA payment until they reach age 53. Therefore, the simple phase for our example will only last two full fiscal years from age 53 to age 54.

Now let's compute the COLA payments through age 54 during the simple phase. By the time our retiree reaches age 54, their cola has grown from zero to $2,160. PERS calls that cola factor one. That factor one amount will be added to the compound phase, which PERS calls cola factor two, to arrive at the total cola for any given year.

Starting at age 55, for our retiree, the compounding begins. This is the most financially powerful phase as the 3% is no longer applied just against the original base benefit amount. Instead, it is applied against all previous COLA increases since the compounding phase began given retiree.

Applying the 3 % against the initial base benefit of $36,000 gives us an initial COLA increase of $1,080 during the first year of the compound phase. Here, we have the same increase in COLA in year 1 of the compound phase as during year 1 of the simple phase.

However, the first year of the compound phase is the only fiscal year that the increase in cola during the compound phase will match the increase during the simple phase. In year two of the compound phase, the annual increase in COLA goes from $1,080 to $1,112. This brings years to compound COLA payment to $2,192.40. If we compare this to year two of the simple phase, you'll see the compound phase in year two has now grown to be $32.40 greater.

The COLA amount will not only increase year after year, during the compound phase as happened during the simple phase, but the annual increase itself in COLA will also increase year after year during the compound phase. Here's a table to illustrate the annual increase in total compound COLA payment for age 55 through age 58.

In just four years of compounding, the annual COLA payment has grown from the initial $1,080 to over $4,518. That's the power of compounding at work, and it started five years earlier than it would have for a Tier 4. The last step is to combine the two phases of COLA's together to arrive at the total COLA for any given year.

Let's look at a final table to illustrate the two COLA components being added together for our retiree from age 52 to age 58. Here, the first column contains the full fiscal year since retirement. Second column contains the age. Third column contains the COLA interest phase, simple verse compound. Fourth column is the total simple COLA interest. Fifth column is the total compound COLA interest. And the sixth column is the combined COLA payment our retiree would receive that year. As you can see, the combined COLA grows from $1,080 in the second full year of retirement to over $6,600 by the seventh full year of retirement.

Understanding the two phases of the cola and how to add the two phases together is the key to calculating your cola in any given year. If you need a refresher on when Mississippi PERS retirees become eligible to receive a COLA, or when compounding begins for tiers 1 through 4, please watch our previous episodes in our COLA series and playlist.

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, 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.