Chapters

00:00 Understanding Retirement Decisions

02:50 Financial Readiness for Retirement

05:41 Hidden Financial Factors in Retirement Planning

Transcript

Hi everyone, I'm Ryan Earley, host of the PERS Pro YouTube channel. In our last video, we looked at the data behind when Mississippi PERS members typically retire. Today, we are shifting from when everyone else does it to when should you do it. Deciding to retire is one of the biggest moves you'll ever make and there are five major considerations. Money, health, relationships, purpose and time. In today's video, we are diving deep into the first - finances - to help you decide when you are financially ready to retire. Let's get started.

The first question in deciding how much money you need in retirement is always, how much will I spend? Many people assume spending drops significantly the day they stop working, but the data tells a different story. According to research on retiree behavior by Employee Benefit Research Institute and J.P. Morgan, PERS retirees often experience a spending surge in the first two to five years of retirement. During this go-go phase, spending can actually be equal to or even 10 % higher than pre-retirement income levels as members travel and tackle home renovations. However, according to surveys conducted by the Bureau of Labor Statistics, real spending typically decreases often by 5 to 8% every five years as lifestyle activities slow down, though this is often partially offset by rising healthcare costs. Between the ages of 60 and 85, spending decreases on average by more than 30%. When planning your retirement budget, keep in mind the top three major expenses for retirees according to BLS and Mutual of Omaha. Housing = 33 to 35%. This remains the largest expense covering property taxes, insurance, utilities, and maintenance, even for those with a paid off mortgage. Transportation = 14 to 15 % includes vehicle purchases, fuel, insurance, and maintenance. While commuting costs vanish, leisure travel to visit friends and family often increases. Healthcare = 12 to 15%. This is the fastest growing category as you age. This is the most volatile category as well, typically starting low and early retirement and increasing significantly in the later years as out-of-pocket costs and long-term care needs arise.

Now, let's look at the replacement rate. How much of your current paycheck will PERS and Social Security actually cover, and how does that change the longer you work? For a Tier 2 member, again, those hired between July 1st, 1992, and June 30th, 2007, the PERS maximum allowance formula is 2% for the first 25 years and 2.5% for every year after that computed against your highest four years of compensation. Here is a table that combines estimated PERS pension with estimated Social Security benefits taken early or at normal retirement age for someone with 25 to 40 years of service. Looking at the table, you can see that the PERS pension replaces 50 to 87.5% of your income depending on when you choose to retire. If you take Social Security early, the percentage of your income replaced increases to 78% to 115% depending on your years of service at retirement. And finally, if you take Social Security at normal retirement age, the percentage of your pre-retirement income replaced increases to 90% to 127%, again, depending on your years of service at retirement.

One of the most effective ways to retire earlier isn't just making more money, it's needing less. This visual demonstrates how debt acts as a weight, requiring a much higher gross pension to maintain the same lifestyle. If you have a $2,000 monthly mortgage, you need roughly $24,000 more in annual after-tax income to retire comfortably than someone with a paid-off home. Eliminating high interest debt like credit cards or car loans before you sign those PERS papers also removes this weight.

We also have to talk about investment risk. Your PERS pension is a defined benefit, meaning it's a stable monthly check for life, assuming the state continues funding its obligations. But many of you also have 403Bs, 457Bs, or IRAs. The more your lifestyle depends on these outside accounts and the more risky assets held within them, like stocks, the more of a cash cushion you should have. In a bull market, your portfolio can grow even while you take withdrawals. In a flat market, withdrawals can reduce your principal. And in a bear market, withdrawals can deplete your account on top of the drop in portfolio values. This table shows why a cushion is necessary for assets being relied upon outside PERS and Social Security. If the market drops 20% in your first year of retirement, you don't want to have to be forced to sell your investments in these outside accounts to pay for groceries. By keeping one to two years of living expenses in your emergency fund held in safer assets like high yield savings or CDs, you ensure that even if the market has a bad year, your PERS pension, social security benefits, and your cash reserves keep your lifestyle steady while your stocks have time to recover before you have to sell to continue to fund your lifestyle.

Beyond income needs, debt and investment risk, don't forget these hidden financial factors. COLA: Remember, your cost of living adjustment, or COLA, doesn't start immediately for everyone. And you may not transition from simple COLA to compounded COLA for quite some time. Watch our videos in our COLA playlist for more information. Taxes: Your PERS and Social Security benefits are subject to federal income tax, though Mississippi currently does not tax retirement income at the state level. PERS option: Choosing a benefit other than the maximum retirement allowance option will result in reduced benefits for life for you, but greater protection for your beneficiaries.

Ready to take action? Here's your homework for today. One, run a high-low budget. Calculate what you need to live on, your bills, versus what you want to spend, travel and hobbies. Factor in debt that will be paid off by the time you retire. Two, get your PERS estimate. Visit pers.ms.gov to run a benefit estimate using their online calculator or better yet, if you are within one year of retirement, contact PERS for an official estimate. Three, check your social security estimate. Go to ssa.gov to see your earnings history and see your projected benefits at age 62 versus age 67.

I hope this video helps you feel more comfortable about the math behind deciding when to retire. In our next video, we'll move to the second major consideration when deciding when to retire, your health. Please make sure you subscribe so you don't miss this and other videos in our new retirement series. If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members. If you have a follow up question about PERS or anything else related to personal finance, please visit our website at perspro.ms and submit your question or topic for a future episode. Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

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.