Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today we discuss decoding government pensions. Your top five questions answered. Today, we’re going to answer your top five government pension questions, and we’re going to use a case study by using good old Florida. We’re going to use the Florida Retirement System (FRS) to answer these top five questions.
Section 1: How Much Will My Government Pension Be When I Retire?
For us to be able to know how much anyone’s pension is going to be when they retire, there are a few things that most of us need to figure out. Number one is, it’s going to normally be based on your years of service, so we need to know how many years that you’ve worked that are qualified. Now normally your qualified years are going to be the same as your working years. There are some one-off circumstances, maybe you received a promotion and you had different classification or maybe some of those years did not count towards that particular pension system.
In most cases, the years that we work are the years that qualify for our pension. Once you have a year’s of credible service, you need something called a pension multiplier. That number can vary. But in Florida, if you are a regular class, that pension multiplier is 1.6%. If you’re considered a special risk member, that pension multiplier is 3.0%. So, one of those two will be your pension multipliers in the state of Florida. You will need to see in your own state what your pension multiplier is.
Using your pension multiplier
After you have your pension multiplier, you then need to multiply your years of service by that pension multiplier. In Florida, if you had 20 years of service, then 1.6 percent times 20 would be 0.32. 30 years of service would be 0.48, 40 years of service would be 0.64, 50 years of service would be 0.80.
And that is where the pension multiplier of 1.6% comes in. Now if we change that pension multiplier to 3.0%, that’s almost double of the 1.6, so that’s basically how each of the numbers are going to turn out. But you will see that 20 years of service would give you 0.6. 30 years of service will give you 0.9. 40 years of service will give you 1.2 and 50 years of service will give you 1.5. And that is if you were a special risk member, you would receive a 3.0% pension multiplier in the state of Florida.
You then take that number and multiply it by your average annual compensation and in the state of Florida, that’s your top five years of earnings. That is what you would take the average of your top average five years. So for most people, it’s going to be the last five years that you work.
Calculating Your Government Pensions
And for this case study, we’re going to assume that we made $60,000 over the highest five years of earnings. That’s what we averaged each year. And then we’re going to multiply that $60,000 by that previous number we got. Which basically tells us what percentage of our salary are we going to receive as our pension on an annual basis.
For 20 years of service, you would receive 32 percent of your $60,000 salary as your pension. That is $19,200 or $1,600 a month. For 30 years of service, you would receive almost 50% of your salary, which amounts to $28,800 per year or $2,400 a month. For 40 years of service, you would receive 64% of your salary, resulting in $38,400 per year or $3,200 a month. And if you had 50 years of service, you would get to keep 80% of your annual salary for your top five years. That would be $48,000 or $4,000 per month.
Section 2: Factors Influencing the Calculation of Government Pensions
What factors influence the calculation of my government pension? We’ve already gone over most of the factors. So far, we know that years of service, pension multiplier, and highest five years annual compensation are the three main levers that impact your government pension calculation.
In the state of Florida, there have been some law changes that may impact your overall pension as well. For example, the number of years you need to work to be considered fully vested changed after July 1st, 2011. If you were in the Florida Retirement System before that date, you needed five credible years to be fully vested. After the changes, the number increased to eight years.
Another change was in calculating the average annual compensation. Before the changes, only the top five earning years were considered. After July 1st, 2011, the number increased to the eight highest average years of earnings.
Benefits are always reduced
It’s important to note that whenever there’s a new iteration in your pension plan, it’s almost always going to reduce the benefits. Adjustments are made to take into consideration factors like increased costs, longer life expectancy, or higher incomes. So, if you were in the system before July 1st, 2011, you have a better pension plan compared to those who entered after that date.
The payout method you choose can also influence your government pension. The Florida Retirement System offers four payout methods: life only income benefit, life with a ten-year certain, a hundred percent benefit paid to the survivor, and two-thirds benefit paid to survivors.
Each payout method corresponds to a different level of risk and guaranteed income. The life only option provides the highest benefit based on your lifespan. The life with a ten-year certain option offers some certainty by guaranteeing a minimum of ten years of payments. The hundred percent benefit paid to the survivor is often considered the lovers’ option, as both you and your spouse will receive the pension benefits based on your joint lives. Lastly, the two-thirds benefit paid to survivors offers a reduced benefit to the surviving spouse.
Section 3: Can I Retire Early and Still Receive My Full Pension Benefits?
Can I retire early and still receive my full pension benefits? To answer this question, we need to understand what’s considered normal retirement versus early retirement.
Normal retirement vs. Early Retirement
In the state of Florida, for someone who was in the system before July 1st, 2011, normal retirement would require being vested (five years of work) and 62 years of age. Alternatively, you could have 30 years of credible service before the age of 62 and still be considered fully retired and eligible for your full pension.
For those who entered after July 1st, 2011, the normal retirement age increased to 65 years of age, coupled with being vested for eight years or having 33 years of credible service before the age of 65.
If you’re in the special risk classification in Florida, you can retire early at the age of 55 and be fully invested (five years of service) or have 25 years of special risk class service before the age of 55. Other combinations of special risk service and military service may also qualify.
It’s important to note that retiring early will result in a reduction of your pension benefits. The reduction is 5% for each year you retire early, and any partial year is prorated on a month-to-month basis.
Section 4: Are Government Pensions Inflation Adjusted Over Time?
The answer to this question will depend on your state’s pension program. In the state of Florida, government pensions entered after July 1st, 2011, no longer have an inflation-adjusted benefit. However, if you were already in the system before that date, you do have an inflation-adjusted benefit that increases over time to help maintain your purchasing power.
Without a cost-of-living adjustment, your pension may become less effective as you get older, as the price of commodities and services increase over time. To offset this, it’s important to have additional investments that can keep up with inflation and maintain your desired lifestyle.
Section 5: What is the Best Age to Start Receiving My Government Pension?
The best age to start receiving your government pension will depend on your individual circumstances and goals. From a purely financial standpoint, if you can work until you receive your full retirement benefits, that may be the ideal choice.
However, there are other factors to consider. Factors such as physical and mental health, stress levels, family responsibilities, and personal preferences can play a role in your decision to retire early. Your time is a valuable asset, and if retiring early allows you to focus on what matters most to you, it may be worth considering.
Keep in mind that retiring early will result in a reduction of your pension benefits, but the peace of mind and increased quality of life may outweigh the financial impact. It’s important to make an informed decision that aligns with your goals and priorities.
Final Thoughts on Government Pensions:
Decoding government pensions can be complex, but armed with the knowledge of how they are calculated and the factors that influence them, you can navigate the system with confidence. Understanding your pension multiplier, years of service, and average annual compensation are key to estimating your government pension.
Additionally, being aware of the impact of retiring early and the different payout options can help you make informed decisions about your future. While government pensions may not be inflation-adjusted in some states, it’s crucial to have a plan in place to mitigate the effects of inflation and ensure a secure retirement.
Ultimately, the best age to start receiving your government pension depends on your unique circumstances and priorities. Consider your financial goals, health, and personal aspirations when making this decision.
Remember, wealth is more than just riches; it encompasses peace of mind, happiness, and fulfillment in retirement. Plan wisely, make informed choices, and enjoy the journey to a prosperous retirement.
Image from: Freepik.com
Florida Retirement System: Pension Plan: Ready. Set. Retire.