How to Calculate Your CalSTRS retirement benefits
If you ask a California public school teacher what CalSTRS is, they’ll likely respond that it has something to do with their retirement. But for many, that’s as much as they know. In fact, a lot of teachers that I work with have never calculated how much they’re expected to receive from their CalSTRS pension when they retire. Nor do they know when is a good age to retire to maximize their benefits.
Why worry about CalSTRS now?
As appealing as it may sound now to postpone the retirement discussion, it’s not necessarily in your best interest. If you figure out these details now, you’ll have a good idea of how much your fixed income will be during retirement. Not only that, but you can calculate how much you need to save to your voluntary 403(b) plan to supplement CalSTRS.
Let me walk you through the steps so you can rest a bit easier and know that you’re doing what’s necessary now to enjoy those golden years later.
1. Figure out your Benefit Structure
This is done using your initial hire date:
- CalSTRS 2% at 60: You were first hired before 01/01/2013 or were a member of a concurrent retirement system before 01/01/2013 and you performed service under that system within six months of becoming a CalSTRS member.
- CalSTRS 2% at 62: You were first hired on or after 01/01/2013.
2. Calculate your Retirement Benefit
Retirement Benefit = Service Credit x Age Factor x Final Compensation
Scratching your head at what service credit and age factor are? Let me walk you through those variables:
a. Know your Service Credits
Full-time employees generally earn 1 service credit per 1 school year. Part-time employees generally earn a percentage of a service credit based on the percentage of the full-time contract.
Service credit at retirement = Current service credit balance + future service credits expected
For example, if you currently have 20 full-time service credits and are expected to work another 10 years full-time, your service credit at retirement is estimated to be 30.
If you work 50% of the full-time contract, you will receive 0.5 service credit for that year.
*Any contributions on earnings from service in excess of one year will be credited to your Defined Benefit Supplement (DBS) account up to any compensation cap.
*For CalSTRS 2% at 60, if you purchased “air time” previously, you can add this to your total service credit at retirement. The ability to buy “air time” ended on 12/31/2012.
What about unused sick leave?
Unused sick leave becomes service credit at retirement:
Days of unused sick leave / # of base days for full-time service = Service credit granted
*The base service days cannot be fewer than 175 days. If you’re an administrator, add the vacation days per contract year.
For example, if you have 125 unused sick days, and 182 full-time service base days, the service credit granted is 0.687 service credits (125/182). If you’re expected to have 30 years of service at retirement, you will now have 30.687 years of service at retirement.
b. Find your Age Factor
Remember your benefit structure that we discussed at the beginning?
CalSTRS 2% at 60
The age factor is set to 2% at age 60. If you retire prior to age 60, this will decrease.
The earliest you can retire is age 50 with a base age factor of 1.1%. However, you must have 30 years of service credits to retire between 50 and 54 years old.
*If you have 30 years of service at age 50, your age factor is 1.3% (1.1% base + 0.2% career factor). (This can be found in the Member Handbook under Age Factor Tables.)
*However, if you have 20 years of service at age 50, you can’t retire until age 55 because you don’t have the mandatory 30 years of service to be able to retire between 50 and 54.
You can retire with any amount of service credits starting at age 55. If you have 30 or more years of service under the 2% at 60 benefit structure, a career factor of 0.2% will be added to the age factor until it maxes out at 2.4%. The age factor maxes out at 2.4% at age 63 regardless.
*If you retire at 60 years old with 30 years of service, your age factor is 2.2% (2.0% base + 0.2% career factor).
*If you retire at 60 years old with 29 years of service, your age factor is 2.0% (2.0% base + 0.0% career factor).
CalSTRS 2% at 62
The age factor is set at 2% at age 62. If you retire prior to age 62, this will decrease.
The earliest you can retire is at age 55 with an age factor of 1.16% with any amount of service credits. The age factor maxes out at 2.4% at age 65. (With this benefit structure, there are no career factor benefits.)
*If you retire at 60 years old with 30 years of service, your age factor is 1.76%.
c. Calculate your Final Compensation
CalSTRS 2% at 60:
- If you have 25 or more years of service credit, CalSTRS will use your highest 12 consecutive months of average annual compensation.
- If you have fewer than 25 years of service credit, CalSTRS will use your highest average annual compensation during any period of 36 consecutive months of paid employment covered by CalSTRS.
- Your final compensation is based on your highest 36 consecutive months of average compensation, regardless of how many years of service.
If you want to get a really rough estimate of your financial compensation, you can use a Time Value of Money calculator. Enter the following values:
- Mode: Choose “End”.
- Present value: Enter in your current annual salary.
- Payment: Leave blank.
- Future value: Leave blank.
- Annual rate (%): Enter in an estimate of the average annual pay raise you expect to receive. If you think you should average a pay raise of 3% per year, either put that in or put in a lower number, such as 2%, if you want to be more conservative.
- Periods: The number of additional years you expect to work. If you think you’re going to retire in 10 years, put in “10”.
- Compounding: Choose “Annually” from the list.
- Press on the “FV” button to calculate your estimated final compensation.
*For example, if you currently make $80,000/year and are expecting to retire in 10 years with an average pay raise of 2% per year, your final compensation is estimated to be $97,519.55. Keep in mind that this is only a rough estimate!
Cheers to progress! We’ve gone through the variables, so now we can calculate your retirement benefit! Remember:
Retirement Benefit = Service Credit x Age Factor x Final Compensation
Let’s look at an example:
You are 60 years old with 30 years of service credits. You’re looking to retire in 2 years. Your final compensation is estimated to be $90,000 per year at retirement. Let’s calculate!
1. Calculate manually:
Before technology swooped in, we had to do this stuff by hand. (Remember that with this example, you fall into the CalSTRS 2% at 60. That is important for your career factor.)
32 (service credits) x 2.4% (max age factor + 0.2% career factor) x $90,000 (final compensation)
= $69, 120 per year benefit
2. Use the CalSTRS online calculator:
But yes, technology has made our lives easier, at least in some ways! This calculator will also show you the estimated benefits for the various beneficiary options available … which brings me to … beneficiary options! (You didn’t think that was it, did you?)
3. Choose a Beneficiary Option
- Member-only Benefit
This option will give you the highest monthly benefit for your lifetime. However, the benefits stop after you die, whether that is 1 year or 40 years into retirement. If there are any remaining contributions and interest in your Defined Benefit account, they will be paid to your beneficiary or estate in a lump-sum payment.
- 100% Beneficiary Option
You will receive the most reduced benefit with this option. If you die, your beneficiary will receive 100% of what you received. If your beneficiary dies before you, your benefit will be increased to the Member-Only Benefit.
- 75% Beneficiary Option
You will receive a reduced benefit. If you die, your beneficiary will receive 75% of what you received. If your beneficiary dies before you, your benefit will be increased to the Member-Only Benefit.
- 50% Beneficiary Option
You will receive a reduced benefit. If you die, your beneficiary will receive 50% of what you received. If your beneficiary dies before you, your benefit will be increased to the Member-Only Benefit.
The lower the percentage for the beneficiary, the greater your payout. After the member-only benefit option, the 2nd highest option for you is 50%, which gives your beneficiary 50% of your pay when you die. With the 75% option, you receive a little less, but your beneficiary will receive 75% of your pay. And lastly, you receive the lowest payout with the 100% option because your beneficiary will receive the same amount as you.
That wasn’t so bad, was it? Do you feel a bit more prepared? You’ve devoted your career to our state’s future, so it’s high time you sat down and thought about your own. For more information, be sure to check out the Member Handbook or let yourself be taught for a change with CalSTRS tutorial videos. There’s a wealth of information out there for the taking!