Chapters

00:00 Introduction to Accumulated, Unused, Uncompensated Leave at Retirement

00:33 Why Unused Leave Must be Certified for Service Credit or Paid Out

01:12 Rules for Certifying Unused Leave to PERS for Additional Service Credit

02:36 Rules for Cashing Out Unused Leave at Retirement

04:07 Comparing Pros and Cons of Cashing Out Unused Leave at Retirement vs Converting Unused Leave into Service Credit at Retirement

05:20 Introduction to Case Studies and Assumptions Used

06:01 Screen Share of Unused Leave Decision Calculator

06:45 Case Study #1 - $50,000 Earner + $105 Per Day Comp for Unused Leave

08:20 Case Study #2 - $100,000 Earner + $155 Per Day Comp for Unused Leave

09:49 Lessons from Case Studies

10:59 What to do With Marginal Leave Above Conversion Cliffs

12:18 Action Items

13:02 Preview of Next Video and Calls to Action

14:16 Legal Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, former public school finance officer, current financial planner, and host of the PERS Pro YouTube channel. Today, we are diving deep into the rules and math behind certifying unused leave for service credit versus taking the cash payout, and by the end of this video, you'll have a better idea of which path leads to your best retirement outcome. Let's get started.

If you watched our last video, video number 56, you saw us walk through form 9A SRVC, Pre-Application for Service Retirement. When you get to section five of that form, your employer has to report two specific numbers regarding your unused leave at retirement. Your projected gross leave payment and your projected unused and uncompensated leave balance. Your employer cannot properly complete this section five without your input.

You must decide how many days of your personal or sick leave you want to be paid for by your employer at retirement versus how many days of your leave you want to certify to PERS to potentially increase your service credit. Under Mississippi law, any unearned but uncompensated and unused leave you have at retirement can be converted into additional retirement service credit. Here's what you need to know about this option. 

First, unlike the cash payout option, there is no state mandated cap on how much leave you can certify to PERS for service credit. Second, PERS uses a specific conversion table to turn those days of unused leave into years of additional service credit as shown here. For example, if you have 15 days of uncompensated unused leave at retirement, you can certify that to PERS to receive an additional 0.25 or quarter year of service credit.

You'll notice, however, that the next increase in service credit doesn't occur until you accumulate 78 days of uncompensated unused leave. At that point, you can convert those 78 days of leave to 0.5 or half a year of service credit. After that, every 21 days of unused leave beyond 78 days of leave will get you another month or 0.0833 years of service credit. By certifying this leave to PERS, you are effectively increasing your total service credit variable in the PERS formula, which increases your monthly benefit for the rest of your life. It will also grow with COLA every year. 

Now let's look at the cash payout option. Most PERS covered employers allow you to be paid for a portion of your unused leave at the time of your retirement and will include this payout in your last check. Here's what you need to know about this option.

First, by law, an employer can only compensate you for a maximum of 30 days of unused leave at retirement. Second, the rate you are paid for this unused leave depends on your employer type at the time of retirement. Here's a snapshot of various rates at retirement. Nine month faculty members of the eight institutions of higher learning could be compensated for up to 30 days of major medical leave, licensed employees with a public school district in a position that requires a license, can be compensated at the rate paid to substitute teachers, and non-licensed employees with a public school district can be compensated at the federal minimum wage rate. 

Benefits. Although you would think taking cash today means forgoing future benefits, there are actually two future benefits that can increase when you cash out your unused leave. First, because this is earned income, it actually counts toward your Social Security earnings record for the current calendar year which may nudge your future Social Security benefit upward if the current calendar year ends up being one of your highest 35 years of inflation adjusted earnings. Second, if the current fiscal or calendar year is one of the highest four being used to calculate your PERS average compensation, then your PERS retirement benefit may be nudged higher as well. 

Before we dig into the numbers with two examples, let's recap the pros and cons of deciding to take cash for your unused leave vs deciding to certify that unused leave towards service credit. 

First, the payout or cash now option. Pros, this creates the greatest amount of cash now. It can also result in a small increase in both your future social security retirement benefit and your PERS retirement benefit. Cons, this option may not increase your future social security retirement benefit if the current calendar year will not be one of your highest 35. For example, if you retire early in a calendar year. Second, this may not increase your PERS retirement benefit if the current calendar or fiscal year isn't one of your highest four years of compensation.

The second option, certifying for credit or pension later, pros, you get a larger monthly per pension check for life. This higher base also makes your 3 % COLA more valuable every year. Cons, there's no immediate cash and there's no impact on your social security benefit. There's also less of an impact on your PERS pension for those selecting a PERS option other than the maximum allowance option.

Now let's look at the math for two different retiree scenarios, both assuming a 3 % inflation rate, a 3 % PERS cost of living adjustment, and a 3 % Social Security cost of living adjustment. We are going to assume for both of these case studies that the retiree is a PERS tier two member, 55 years old, will take Social Security at their full retirement age of 67, are selecting the PERS maximum benefit allowance option,have 30 years of PERS service credit, and have 15 days of accumulated uncompensated unused leave at retirement that they are trying to decide whether to be paid out or certified to PERS.

Here's a look at the model I built that takes into account a PERS retirees tier, PERS retirement benefit option, years of credible service, average compensation, unused leave in days at retirement, unused leave payout rat, PERS retirement age, Social Security retirement age, iife expectancy, inflation rate, PERS cost of living adjustment rate, and Social Security cost of living adjustment rate.

I can change any one of these variables to calculate the nominal and inflation adjusted lifetime benefit of choosing the cash payout versus certifying the leave. Now let's see how using this model can make the decision easier.

Case study number one, the $50,000 earner. Their profile, they have an average compensation of $50,000. Their unused leave payout rate is $105 per day. 

Payout option, if they take the payout, they can receive $1,575 gross cash at retirement. This also increases their PERS pension by $246 per year. The cash payout,also increases the social security benefit by approximately $14 per year. Combined, this is an additional $260 per year of increased future benefits on top of the cash payout. 

Certify option. 15 days adds 0.25 years of service credit. This increases the PERS pension by $312.50 per year. Breakeven. In this example, it would take our retiree about 27 years of retirement for the extra service credit to surpass the cash payout, taking inflation into account. This break even point would mean the retiree living to the age of 82. 

So how would the cash payout compare to certifying for service credit at different ages for this retiree? If they live to 75, the cash payout wins by $362. If they live to 80, the cash payout still wins by $102. If they live to 85, certifying leave $3,000 wins by $158 and if they live to the age of 90, certifying wins by $418. 

Now let's look at a second case study. This one is the $100,000 earner. Their profile, their average comp is $100,000. Their unused leave payout rate is $155 per day. 

Payout option. If they take the payout, they can receive $2,325 gross cash at retirement. This also increases the PERS pension by $363 per year. This also increases their social security benefit by approximately $10 per year. Combined, this is an additional $373 per year of increased future benefits on top of the cash payout. 

Certify option, 15 days adds 0.25 years of service credit. This increases the PERS pension by $625 per year. Breakeven, in this example, it would take our retiree only about nine years of retirement for the extra service credit to surpass the cash payout taking inflation into account. This break even point would mean the retiree living to the age of 64. 

So how would the cash payout compare to certifying for service credit at different ages for this retiree? If they live to 60, the cash payout wins by $1,026. If they live to 65, certifying wins by $282. If they live to 70, certifying wins by $1,570. If they live to 80 certifying wins by $4,088, and if they live to 90 certifying wins by $6,606. 

What this exercise demonstrates is that for a tier two PERS retiree who is 55 years old and who plans to draw social security at 67 and is selecting the PERS maximum retirement allowance option, the longer they expect to live and the higher their average compensation, the more financially advantageous it is for that retiree to certify their leave. 

The opposite is also true. The shorter they expect to live and the lower their average compensation, the more financially advantageous it is for that retiree to take the cash payout. 

It also demonstrates just how many different variables come into play when making this decision beyond what you would initially think, such as the age you plan to claim Social Security retirement benefits, your PERS tier, and the PERS retirement option you plan to select.  This is why I had to custom build a decision calculator to help my PERS families make the best decision for their unique situation. 

Lastly, what this exercise demonstrates is that getting this decision wrong for the most part isn't going to derail your retirement, though as case study number two showed, it can be a several thousand dollar mistake.

Let's revisit the leave conversion table one more time to talk about marginal leave above certain cliffs, such as leave balances between 16 and 77 days, or leave balances between 79 and 98 days. Certifying this excess marginal leave to PERS gets a retiree no immediate or future benefit, and as such, you should elect to be paid out for as much of this leave as you can up to the 30-day limit. 

For example, suppose you're projecting to have 50 days of unused leave at retirement, you work for a public school district and you have no other leave you have certified to PERS from prior employers. Let's also assume you have run your own numbers and determined that certifying leave to convert to service credit is in your best interest. 

In this case, you should instruct your employer to certify only 15 days since certifying any extra days doesn't get you any additional service credit. You would also instruct the employer to pay you out for the maximum 30 days.  This would leave you with five projected leave days left that are unaccounted for. 

One option if your employer's policy allows is to use those days between the time you file your Form 9A and your retirement date. Another option depending on your employer's policy would be to donate those days to a colleague. Of course, you could also certify those five days in addition to your 15 days if you have no other use for them.

If you are deciding whether to be paid out for your unused leave or certified the unused leave for additional service credit, here are your action items for today. One, request your leave balance. Get your exact number of sick and personal leave hours or days from your HR or payroll department. Also, if you've worked for other employers, make sure all unused leave when you left those employers was properly certified to PERS. Two, check the conversion table.  Use the PERS member handbook to see how many quarters or months of credit your leave will buy you. Three, run your own breakeven analysis. Determine the age at which certifying leave for additional service credit is more advantageous than taking the cash payout. Then ask yourself, do I expect to live that long?

I hope this video helps PERS members better decide how many days of unused leave to certify to PERS for additional service credit, versus how many days of unused leave to be paid out. In our next video, we'll review how to complete PERS Form 9S Service Retirement Application. 

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 plan for retirement, including deciding whether to certify or pay out unused leave, 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.