Note: I chose to write about the California pension system because that is where I live. If you want information about a system used in another state (or a private system), let me know in the comments and I’ll do some research for a new post.
CalSTRS pension is a retirement program that pays retired employees a set monthly amount for the rest of their lives. If you work long enough, you can actually earn more in your pension retirement than you can while working. Let’s dig in.
Pensions work differently than most retirement accounts. Rather than putting money into a retirement account and hoping that the investments grow over time, the benefit you receive from CalSTRS comes from a formula which incorporates your age, maximum salary, and number of years of service. As stated above, if you earn a pension, you will receive a monthly paycheck for the rest of your life based on that formula. Four institutions contribute money to this fund: your own paycheck, your district, California taxpayers, and investment returns managed by CalSTRS.
That’s the formula that determines your benefit. In theory, the formula is quite simple, but the variables can become a bit complex. CalSTRS has a calculator for you to estimate your monthly benefit, but it would help to know what each variable meant
Very brief description: number of years worked.
1 service credit is earned after 1 year of full-time teaching. You also earn service credit from unused sick days. You are eligible for a pension benefit with 5 service credits, but you will obviously earn more with more credits.
Very brief description: a percentage that increases each year you delay retirement
The age factor is a percentage of your benefit determined by your retirement age. You will be in one of two categories depending on when you were hired. If hired before January 1st, 2013, you are considered CalSTRS 2% at 60. If hired after, you are 2% at 62. The split was part of the California Pension Reform Act of 2013. As you will see below, the 2% at 60 group is more desirable.
Age 55 is the earliest you can receive benefits from CalSTRS, which is why it is the first age listed on the table. If you retire earlier than 55 (or move out of state), you will still receive a benefit as long as you have worked at least 5 full years in total, but you cannot collect that benefit until you turn 55. Waiting until later to collect that benefit is advantageous because your age factor increases each year until you reach the maximum of 2.4%.
If possible, your goal is to max out that age factor at 2.4%. Once you do that, you may think that your retirement benefit no longer increases if you work for longer. This is incorrect, as your service credit will increase each year (and your final compensation may as well).
Very brief description: yearly salary
This amount is based on your highest salaries. For most of you, the number is the average of your 3 highest yearly salaries. If you are CalSTRS 2% at 60 and have earned 25 or more service credits, then your final compensation is simply your highest yearly salary of any single year in which you worked.
The linked example above shows an example calculation based on monthly benefits. If you wish to see how this translates to a yearly benefit, just multiply by 12. Notice that for Faye, working an additional four years results in a monthly benefit increase of $1300 (a yearly benefit increase from $28,000 to $44,000)! That’s a big difference for only four extra years of work.
The CalSTRS retirement calculator can be found here.
You most definitely pay taxes on your pension benefit.
Medical coverage is not included in your benefit. When you retire, you lose your district health coverage. Waiting to retire until MediCare benefits take into effect (age 65) can be wise to avoid paying for healthcare on the individual market.
You can theoretically earn more each year in retirement than by working. To calculate when this happens, the only two numbers you need are your service credit and age factor. If your value is greater than 100, then you will earn more than 100% of your working salary. For example, let’s imagine that I begin working full-time at age 25. I will reach my maximum age factor of 2.4% at age 65 after 40 years of service. When I multiple 40 and 2.4, the result is 96, meaning that my benefit will be 96% of my salary. If I work two more years, I will have accrued 42 years of service, resulting in a benefit of 100.8% of my salary (42 times 2.4).
In addition to your primary pension account, if you coached or worked overtime, you are eligible for the CalSTRS Supplemental Retirement program.
That being said, I am worried about the long-term viability of our pension. Because of underfunding and unrealistic investment return goals, our pension is struggling. Governor Jerry Brown has discussed that further cuts in the pension are likely, and the California Rule protecting current pensions is under attack in the courts. To prepare for the worst-case scenario, I have saved for retirement assuming that I will receive no funds from my pension by focusing on my 403b and IRA. Although unlikely, there are only upsides to being wrong.
If you have any questions about your CalSTRS pension, this AskJack series is great.