In 2009, the State Teachers Retirement Board (STRS) started planning ways to “strengthen the financial condition” of their retirement system. Much like Social Security, the projected numbers for the teachers’ retirement plan looked dismal at best. Without any changes, STRS would eventually run out of money, unable to fund pension payouts to the hardworking teachers making their way into retirement. Some of these changes already began in July of 2013, but much of the transition period lies ahead.
Continue reading for the 4 meaningful revisions you need to be aware of…
You might’ve noticed that your paycheck and STRS retirement plan contribution amounts changed, back in July of 2013. Before these adjustments were implemented, each teacher was asked to put 10% of their salary into the STRS Retirement Plan. The contribution rate of 10% started increasing in 2013 by 1% each year, until July 1st, 2016, when every teacher will be required to contribute 14% of their own money to their retirement plan.
As an example, if you earn $60,000 per year, before these changes, you contributed $6,000 per year (or 10%). A year from now (July 1, 2016), your contribution will rise to $8,400 (or 14%). Depending on your total income, how you file taxes (married filing joint vs. single filer, etc.), this change could reduce your monthly paycheck by approximately $150 or so as more of your money funnels into your retirement plan as opposed to your after-tax paycheck.
When Can You Retire?
Another big evolution within STRS has to do with your ability to retire and receive “unreduced” retirement benefits. Prior to these modifications, one could retire with unreduced benefits as long as they had 30 years of service in the public system. Going forward, there will be a phase-out period between now and August 1, 2023. In other words, depending on your age and years of service, you could retire with unreduced benefits at 31… or 35 years of service.
For example, if you retire in 2015, you could receive full retirement pension benefits for life, with 31 yrs of service. However, every other year, the “service years” requirement increases by 1 year. As a result if you retire 2017, you will need 32 years of service, in 2019 – 33 years, 2021 – 34 years, and in 2023 you will need 35 years or service to retire and receive the full pension package.
Calculating of Your Retirement Income:
The formula used to calculate your pension benefit amount includes your age, years of service, and Final Average Salary (FAS). The FAS is calculated by taking your five highest years of earnings, multiplying that number by 2.2%, and then multiplying by each year or service (for a maximum of 35 years). Lets say your last 5 years as a teacher were your highest earning years and you earned salaries of $75,000, $76,000, $77,000, $78,000, and $79,000. As a result, the average for those five years would be $77,000. If you are age 60 or older, and have the full 35 years of service, your retirement income (pension) would be calculated as an amount equal to $59,290 per year, for life ($77,000 x 2.2% x 35).
Cost of Living Adjustment:
As most of you probably know, the price of goods and services usually go up each year as a result of inflation. One of the enormous benefits of being part of STRS (or PERS / SERS) is that everyone is covered by a pension plan. This is in contrast to the private sector, in which pension plans have decreased by roughly half within the last two decades. Today, only 13% of private workers are covered by a pension plan and less than 60% are offered a retirement plan match.
To help with increase costs of goods and services as the result of inflation, STRS has a Cost of Living Adjustment (COLA). Before these changes, your pension amount would increase each and every year after you retire by around 2% per year. Now when you retire, there will be no COLA increase in your pension for the first five years. Then, starting in year six, your STRS income will increase by 2% every year, from that point, forward.
With all of the confusion surrounding your STRS choices – whether to take the PLOP, partial-PLOP, Single vs Joint Payout, 50% vs. 100% survivorship, and so on – we strongly urge you to meet with a Fee-Only Financial Planner, or at the very least, an advisor in the STRS department, but take baby steps.
If you are retiring between now and August 2023, please start by sitting down with a retirement plan specialist at the STRS to go over all your options and different scenarios. From there, our best advice would be to create a full-blown, comprehensive financial plan with us or another company you trust, so that you can be unmistakably sure you’re picking the option(s) that align with your future plans after retirement. It’s absolutely crucial to educate yourself so that your decisions aren’t ones that you’ll one day regret!
If you or someone you know has any questions regarding financial planning, portfolio management, or estate planning, please contact me and I would love to confidentially discuss your or their personal situation further.
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Financial advisory services offered through Libertas Wealth Management Group, Inc., a Fee-Only Registered Investment Advisory (RIA) firm. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.