Chapters

00:00 Introduction

00:30 5 Step Framework to Select PERS Option

01:21 Step 1 - Prioritize your retirement goals

02:37 Step 2 - Map the expenses needed each year

05:01 Step 3 - Map the income available each year

06:48 Step 4 - Calculate the gap between expenses needed and income available

07:49 Step 5 - Select the PERS Option that fills the gaps

09:33 Action Items

10:08 Preview of Next Video

11:16 Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, former school finance officer, current financial planner, and host of the PERS Pro YouTube channel. Today, I'm walking you through a comprehensive five-step framework to help you filter through the seven PERS service retirement benefit options to find your perfect fit. Let's get started.

Before we dive into the steps, we have to mention a fundamental truth. Planning for retirement is not a one-size-fits-all process. The PERS option that worked for your parents, sibling, or coworker might not work for you because your spending plan, your health, your debt, your retirement income, your marital status, your beneficiary status, and your legacy wishes are unique to you.

With that said, the framework we created is as follows. Step one, prioritize your retirement goals.  Step two, map the expenses needed each year to meet those goals. Step three, map the income available each year to cover those expenses. Step four, calculate the gap between expenses needed and income available each year. And finally, step five, select the PERS option that fills in the gaps. Now let's walk through each of these five steps in more detail.

The first step is defining exactly what you want your pension to accomplish. You cannot select an option until you know what your priority is. Are you focused on your own lifestyle, protecting a spouse, or leaving a legacy for your children? The PERS option you select determines how benefits are paid to you and your beneficiaries for life. Let's break down the three goal categories you need to prioritize.

Lifestyle, self-focus. If your primary goal is generating the maximum amount of cash while you are alive, perhaps because you have no dependents or your spouse has a significant pension of their own, the maximum retirement allowance option is likely your best fit. It provides the highest possible monthly payment because it contains no insurance cost for a survivor. Survivor protection, family focus. If your spouse or children depend on your income, to pay the bills. Your goal is survivor protection. Options 2, 3, 4, or 4A are joint and survivor annuities. You accept a lower check today in exchange for a guarantee that your beneficiary will receive a check for their entire life after you pass. Legacy, heir focus. If you want to ensure that a part of your benefit goes to your children or a trust in the event you pass early, you might prioritize option 1 or option 4B.

Once your goals are prioritized, step two is mapping the expenses needed each year to meet those goals. Many retirees assume their spending stays flat, but academic research suggests a different reality. Most retirees experience three distinct phases of spending. 

First, the Go-Go years. Up until your mid-70s, retirement spending is often at its highest. You're traveling, dining out, still paying off a mortgage, tackling a home renovation, and starting new hobbies.  For many retirees, spending actually increases up to 10 % over pre-retirement spending levels those first two to five years of retirement. Slow-Go years. In your mid-70s to mid-80s, discretionary spending typically dips in a linear fashion by 1 to 2% per year. You travel less and your home is likely paid off. For some retirees, this phase can sometimes be when retirement spending is at its lowest. The No-Go years. In your late 80s and 90s, spending can continue to decrease 1-2% per year or for some, can spike again. Major medical and assisted living expenses are often the culprit for those experiencing a spike. This phase is where planning for longevity, living beyond age 95 rather than just life expectancy, living until your 80s, is vital to ensure you don't outlive your money. 

Let's look at some charts that help show two common retirement spending patterns through the Go-Go, Slow-Go, and No-Go years. The first chart visualizes the early peak and steady decline model. As you can see in this first chart, your expenses may peak during the first five years of retirement as you pay off that debt or travel, but they then steadily decline as your lifestyle becomes more localized and you enter your Slow-Go years. For someone in good health in their 80s, their spending will continue this decline in their No-Go years. The second chart visualizes the retirement spending smile model. After the same initial peak in the Go-Go years and the same slow-go decline as we saw in the previous model, in the second chart, expenses begin to rise again in the mid-80s during the No-Go years. This second peak is driven by increasing healthcare and assisted living costs, which are critical components of a 30 to 40 plus year longevity plan. Your personal circumstances will drive which model to use but it would be good practice to run both models in your expense mapping exercise.

Step three is mapping the income you have access to from all sources. Aside from PERS, you must account for Social Security, Mississippi Deferred Comp 457B or 403B plans, 401K, IRA, brokerage account, and other pension plans, checking accounts, savings account, and CDs, annuities and life insurance, and income that can be generated from renting or selling a house or business.

Let's look at the intersection of three major income buckets over four distinct time periods to help visualize this step. In the early years, your income available is going to consist of just PERS and possibly personal savings. Now notice what happens with the Social Security income bucket between the ages of 62 and 70. This is when you will start drawing Social Security. Your Social Security benefits are reduced up to 30% from your full benefit if you draw early at age 62 and can be increased up to 24% over your full benefit if you wait until age 70. Also notice what happens with personal savings at age 73. This is the milestone where the IRS requires you to start taking required minimum distributions or RMDs from your tax deferred accounts like your 457B, 403B, IRA, or 401K. Even if you don't need the extra cash, the government mandates these withdrawals which are taxed as ordinary income. In your 70s and 80s, the sudden influx of mandatory income can actually push you into a higher federal tax bracket without proper tax planning. By mapping this income now, it can be particularly helpful in deciding if you should select a PERS survivor option or if your RMDs will be large enough to act as a survivor benefit for your spouse on their own.

Step four is the most revealing, calculating the retirement gap. This is the difference between what you need from step two and what you have from step three. You must run this calculation for two very different scenarios. Scenario A, lifestyle gap. Does your combined income cover your lifestyle? And scenario B, survivor gap. If you pass, will your survivor's sole income cover their lifestyle? The gap for each scenario should be looked at across each year of your retirement and the survivor's needs.  Many retirees realize at this step that while their combined income is plenty to cover their lifestyle, a surviving spouse would not have enough income on their own to pay their monthly bills. 

Let's look at an example. Let's assume a survivor needs $4,500 a month to maintain their current lifestyle. If that survivor has $3,000 a month of their own retirement income, they are left with a $1,500 monthly survivor gap. In this case, whatever PERS option is selected, be sure it covers that survivor gap.

Finally, step five, select the most effective and efficient PERS option. This is where you compare the seven PERS options side by side using the estimate you received from PERS and find the best option that fills the gap identified in step four. Things to keep in mind during step five include life insurance. If you have a large private life insurance policy, you might select the maximum option to fill the survivor gap privately. Alternatively, you may want to shop term life insurance policies against the PERS Joint Survivor Annuity Options and Single Life Annuity Period Certain option and possibly buy a new policy. Efficient Selection. Your goal is to find the option that fills your target gap with the least amount of drag on your current lifestyle. Don't pay for more survivor protection than your gap analysis from step four requires. Pop-up Provision.  Remember, if you choose option 2, 4, or 4A and your beneficiary passes away before you, your benefit can pop up back to the maximum option. This protects you from being stuck with a reduced check if the person you are trying to protect is no longer alive or a divorce separates the two of you. 

Let's look back at our example from step four with the $1,500 survivor gap. If you take the maximum option, you have the most money today but your spouse's $1,500 gap remains completely unfilled. If you jump straight to option two, you've definitely filled the gap, but you are now over-insured, providing twice what the spouse actually needs and taking a much larger permanent cut to your own check to do so. For many in this scenario, option 4A is the Goldilocks choice. It covers the $1,500 gap with a little room to spare, but it leaves more money in your pocket during your Go-Go years.

To apply this framework to your own retirement, here are your action items for today. One, request an estimate. Contact PERS to get your unaudited estimate of benefits that shows what your monthly benefit amount would be for each of your seven PERS options. Two, map your expenses over time. Know what you spend today and how that will change both over time and for a surviving beneficiary. Three, map your income over time.  Know what income your assets will generate over time and be aware of both the benefit and tax implications of withdrawal timing decisions.

I hope this video helps you select the right PERS retirement option for your retirement. In our next video, we'll explore "What partial lump sum options do PERS retirees have?" 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, click YouTube and submit your question or topic for a future episode. And finally, if you're looking for a financial planner that specializes in helping PERS members in their 40s and 50s plan for retirement, please visit our website at PERSpro.ms to learn more about our firm and to schedule your initial consultation. 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.