Tag: retirement

Valid reasons to cash out on your 401(k)

Post author By Y@DminG
Post date October 17, 2018
No Comments on Valid reasons to cash out on your 401(k)

Maybe you’ve changed jobs and forgotten about that 401(k) along with the names of your old coworkers’ kids. Or maybe you haven’t quite forgotten about it, but you thought it was best not to touch it. But life happens, right? As much as we’d all like to save money for the golden years and retire like royalty, as the one and only Mick Jagger put it, “You can’t always get what you want.”

I’m going to go into reasons why you may not want to touch the money in your 401(k). And then I’ll talk about reasons that may justify it. You’ll notice I don’t mention a dream vacation to the Northern Lights, even if you love adventures and dream of going there as much as I do. Life is short, but there are other means to get to northern Europe. But we can talk about that later over a cup of coffee (which by the way I hear is incredible in that region).

Dream vacations aside, I always prefer to hear the bad news first and end on a high note. So, let’s go into the reasons why you may not want to touch that 401(k). Drumroll, please . . .

(By the way, this is meant to be a general overview, but let’s face it: this stuff is confusing. I don’t cover every single tax law, so I urge you to consult a tax professional before you make any big decision.)

The Not-so-good: Reasons why you shouldn’t cash in on your 401(k)

1. All withdrawals from a 401(k) are taxed as ordinary income, based on your tax bracket. If you make $100,000 per year from your job and you cash out the 401(k) worth $50,000 from your old employer, you will now be taxed on $150,000 instead of $100,000. Depending on your situation, this additional income may or may not put you in a higher tax bracket.

2. You will have to pay a 10% early withdrawal penalty to the IRS if you’re under 59.5 years old. This is in addition to the taxes that you owe on the withdrawal.

3. You will have to pay a mandatory 20% federal tax withholding if you take from a 401(k), whether you owe that much or not. If you overpay, you will receive a refund after you file your taxes at the end of the tax year. I’ve met a lot of people who confuse the 401(k) with Traditional IRAs. In Traditional IRAs, we can choose if we want to withhold taxes and the amount we want to withhold. We don’t get a choice if we cash out a 401(k). It’s 20% no matter what.

4. Your retirement will take a hit and it will become harder and harder to make up a savings deficit as you get older because essentially, you’ll have less time. Here are a few scenarios to give you an idea:

Scenario 1: If you’ve saved $50,000 by the time you’re 40 years old and you’re looking to retire at 65, assuming contributions of $881.07 per month and an interest rate of 7%, you will have amassed $1mm by the time you retire.

Scenario 2: If you cash out your 401(k) and don’t start saving until you’re 45, you will need to save $1,919.66/month in order for your account balance to be at $1mm by the time you’re 65.

Scenario 3: If you start with nothing at age 45 and contribute the same as you did before ($881.07/month), your account balance is projected to be $458,973 at age 65. This is a difference of $541,027 . . . all because you cashed out $50,000 and missed 5 years of contributions and compounded interest! Now if you cashed out the $50,000 at 40 but continued to save $881.07/month, your projected account balance at 65 is $713,730. This is still a difference of $286,270!

Do you need that cup of coffee yet? Stick with me. Now we’re getting to reasons that would warrant you cashing in on that 401(k).

Money at your disposal!! Not bad for a first pro, right? OK I know, it’s more complicated than that. I just wanted your eyes to light up for a brief moment.

Reasons why you may want to cash in on your 401(k)

Reason #1: You need to pay off or pay down debt that’s crippling you financially.

Medical Debt

And back to reality we go! Medical debt is no joke. Did you know one million medical bankruptcies are filed a year in our country? But we’re not here to talk about why. Let’s talk about how to avoid that situation.

Disability

I know a dentist who spends $3,000 a month on disability insurance. His, neck, arms, wrists, and hands are so important that if something were to happen to them, he’d have to close his practice and say goodbye to his patients of 30+ years. That’s a lot of money to pay every month for a big what-if, but he’d be taken care of should something ever happen.

If you’re like most of us, you don’t plan for accidents that would leave you disabled. (And have you ever thought about how much your wrists are worth? OK, I digress.) The point is, disability insurance probably isn’t even on your radar, is it? But that doesn’t mean we can’t become disabled. What if something were to happen to you that prevented you from doing your job?

Yep. You could cash in on that 401(k) to get you by. Let’s go to the nuts and bolts, shall we?

If you’re disabled, you may qualify for an exemption to the 10% IRS early withdrawal penalty. OK, one piece of good news! In the event of a disability, that’s one con of cashing in on your retirement that may not apply to you. But you know that the IRS has this condition laid out in very specific terms. You wouldn’t expect anything less from Uncle Sam, would you? According to the IRS, “…an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof . . ..” You need a signed statement from your physician as proof.

If you’re like most of the population and don’t have disability insurance, or if it’s not enough to pay the monthly bills, this can go a long way towards getting you back on your feet.

You are still responsible for paying taxes on it though. (Go back to the Not-so-good section above for more on this.)

Other Medical Debt

Thankfully, not all trips to the hospital have to end in lifelong disabilities. But these days, they do tend to end up in astronomical medical bills.

I read a story about a woman who got stung by a bee and wound up with a $12,000 bill for her trip to the emergency room. A bee sting. $12,000. Ouch on so many levels. And if you’re grappling with something more than a bee sting and strict insurance policies, you could be facing thousands more in debt.

If you ever find yourself in this situation, you will not have to pay the 10% IRS early withdrawal penalty as long as your unreimbursed medical expenses exceed 10% of your adjusted gross income. I truly hope you don’t get to this point, but if you do, this may help you avoid having to declare bankruptcy.

Credit Card or Personal Loan Debt

So maybe you have credit card debt because of medical bills. Or maybe because you took that dream vacation to see the Northern Lights. (Sigh.) I have some European friends who will take out loans every year to take a month-long vacation somewhere. (Let’s not even talk about how Europeans get a minimum of 25 days of vacation every year, nor how most Americans don’t even use up their even fewer vacation days.)

Whatever the reason may be, if you have high interest credit card or personal loan debt, cashing out on your 401(k) may be a good idea.

Average credit card interest rates are between 13-15%. If you fail to make on-time payments, the average interest rate jumps to 27-29%! You don’t have to be a finance expert to see that paying off that kind of debt will take a long time and a ridiculous amount of money. I’ve described one scenario in case you’re like me and like examples to better understand things:

Scenario: Let’s say you have a balance of $5,000 and an interest rate of 15%. According to the Bankrate calculator, if you make minimum payments of $100/month (or 2% of the balance), it will take you 27.5 years to pay it all off. In the end, you would have spent a total of $12,517.52 to pay off $5,000 of debt! In this scenario, it probably would’ve been a good idea to pay the penalties and taxes of cashing in on your 401(k) to use it to pay off your credit card balance. Any extra can be used to build up your emergency fund so hopefully you don’t go back into credit card debt in the future.

And in case you were wondering, the average credit card debt in 2018 is $5,700. If you’re not sure whether your debt merits cashing in on your 401(k), speak with a professional and learn how to save money while paying off credit card debt here.

Also keep in mind that your credit score affects your interest rates. You can learn ways to improve your credit score for the future so you don’t fall victim to the bank and ridiculous interest rates. We know the house always wins, but they don’t have to win THAT much.

Reason #2: You may be in a lower tax bracket right now.

Since none of the money in a 401(k) has been taxed, you will have to pay taxes whenever you withdraw the money. None of us has a crystal ball, but if you think taxes will be higher by the time you retire AND there’s a justifiable reason to pull out that money, then you might potentially save a little bit in taxes.

Scenario: Let’s say you were making $120,000/year before taxes and you were putting away 10% of your paycheck to the 401(k), so $12,000/year. To simplify things, we’ll assume that there are no other deductions, exemptions, or credits. In this scenario, you will have to pay taxes on $108,000. Based on the 2018 tax brackets, you would be in the 24% federal tax bracket. Got it?

OK, now things get a little gloomy. There are cutbacks at the company, etc. and you are laid off at the beginning of the year. You’ve received one paycheck of $10,000 (before taxes) and contributed $1,000 to your 401(k) so far in the year. Assuming you didn’t work for the rest of the year, you will have to pay taxes on $9,000 which equates to the 10% federal tax bracket. Since all 401(k) withdrawals are taxed, everything you pull out will be added to your income for the year. The 24% tax bracket in 2018 maxes out at $157,500. If you want to remain in the 24% tax bracket, you can potentially pull out $148,500 ($157,500 – $9,000). If you want to pay taxes at 22%, which maxes out at $82,500, you can potentially pull out $73,500. Of course, things are never super straight-forward, especially when we’re dealing with the IRS, so make sure you consult a tax professional.

And remember, if you’re under 59.5 years old, you may have to pay an additional 10% IRS early withdrawal penalty. (There are some exemptions, so again I urge you to consult a professional.)

Reason #3: You don’t have a job and need to pay the bills.

Yay! Life doesn’t care that you’re unemployed and you get to pay your bills! (Please note the sarcasm oozing through my fingers as I type this.) Obviously, this will give you instant cash to pay your monthly bills and hopefully, it will last until you find your next job.

You will ideally have an emergency fund consisting of 6 to 12 months of living expenses. If you don’t have any liquid assets and can’t or don’t want to borrow money from family/friends (this can be awkward and lead to more problems you don’t need), then this is pretty much a necessity. This is a great example of why saving towards an emergency fund should always be a top priority.

In Conclusion . . .

Let me be clear that I’m not trying to convince you to cash in on your 401(k). My goal is to inform you, share some experiences, and help all of us make better, more informed decisions. Things are never black and white. (In fact, the Northern Lights are blue, green, yellow, pink . . . my apologies, again I digress.)

Explore all your options and consult a tax professional who knows your complete financial situation. I hope this has helped you evaluate your options and if you ever want to discuss any of this over a cup of coffee, I’m an email or phone call away.

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Tags archive, retirement, retirement plans

Federal Employees Local / State Employees Teachers / Professors

Will I receive spousal or survivor Social Security if I have a government pension?

Post author By Y@DminG
Post date August 1, 2018
2 Comments on Will I receive spousal or survivor Social Security if I have a government pension?

Will I receive spousal or survivor Social Security if I have a government pension?

Spousal and survivor Social Security benefits. Retirement plans and government pensions. Exceptions and more exceptions.

You’re a government employee and you have a government pension coming, but what about your partner’s retirement plan? You may be entitled to some of their Social Security benefits, but does your government pension influence what you receive? It turns out it does, and the government has the details down to a T.

First things first. What are you entitled to?

You can collect up to 50% of your spouse’s Social Security benefits instead of your own. This is good if your own benefits are less than that. If you’re a widow or widower, you can collect up to 100% of your late spouse’s benefits.

Now is when the Government Pension Offset enters the picture.

The Government Pension Offset reduces your spousal or survivor Social Security benefits if you receive a government pension on which you didn’t pay Social Security taxes.

However, the Government Pension Offset doesn’t apply if:

You have a private company pension.
You’re collecting both a government pension and Social Security based on your own work history. Keep in mind the Windfall Elimination Provision may apply.
Your government pension is not based on your own earnings.
Your government pension is from a job for which you paid SS taxes and:
- Your last day of employment that your pension is based on is before July 1, 2004; or
- You filed for and were entitled to spousal/survivor benefits before April 1, 2004; or
- You paid SS taxes on your earnings during the last 60 months of government service.

Keep in mind that if you remarried before the age of 60, you are not entitled to a survivor benefit.

If you’re still with me and those exceptions don’t apply to you, let’s look at the calculation. You have a government pension and are entitled to spousal or survivor Social Security benefits. What happens when those two worlds collide?

Spousal or Survivor Social Security Benefits vs. Your Government Pension

The Calculation

In a nutshell, your Social Security benefits are reduced to 1/3 the amount of your monthly government pension. (Even if you take your government pension in one lump sum instead of monthly payments, Social Security will calculate the reduction as if they were monthly payments.)

Example 1: Your spousal/survivor SS benefits totals $2,000/month and your government pension is $2000/month. We subtract $1,333 ($2,000 x 2/3 (or 0.667)) and you’re left with $667 per month from Social Security (1/3 the original amount) plus $2,000/month from your government pension. Your total combined benefits are $2,667 per month.

Example 2: Your spousal/survivor SS benefits totals $2,000/month and your government pension is $5000/month. Your SS benefits will be completely eliminated because what we would subtract (2/3 of your government pension, or $3,335) is more than your total SS benefits. You are left with just your government pension of $5,000 per month.

If you don’t want to do the math, use the government calculator here.

But it’s not all deductions and bad news!

Don’t forget Medicare. Even if you don’t get cash benefits from your spouse’s work, you can still get Medicare at age 65 based on your spouse’s record if you aren’t eligible for it yourself.

Retirement benefits are a tricky business. Spousal and survivor Social Security benefits aside, calculating even your own retirement benefits as a California public employee and especially as a public-school teacher can be confusing. If you haven’t already, get a solid grasp on what you’re entitled to first, and then figure out what else you may have coming your way from your partner.

Life is unpredictable. The more you know, the better prepared you’ll be for those inevitable twists and turns.

Tags archive, pension, retirement

Local / State Employees Teachers / Professors

Will I receive Social Security if I have CalSTRS or CalPERS?

Post author By Y@DminG
Post date June 23, 2018
12 Comments on Will I receive Social Security if I have CalSTRS or CalPERS?

Person holding sheet with question mark over face

Will I receive Social Security if I have CalSTRS or CalPERS?

If you’re a California public school teacher or public employee, you may have asked yourself this very question. In fact, I get asked it a lot from my clients. Understanding your CalSTRS retirement benefits if you’re a teacher or trying to figure out your CalPERS retirement as a public employee is not that simple. So when we start factoring in Social Security, of course there are going to be questions.

That’s when the Windfall Elimination Provision comes breezing in. It turns out your tax withholdings and previous jobs make a big difference, so let’s clear the air! Because we don’t want to throw caution to the wind when it comes to your retirement. (Let’s see how many more references to wind I can make so you’ll never forget the name of this provision!)

According to the Cambridge English Dictionary, a windfall is a large amount of money that you win or receive from someone unexpectedly. Could that someone be Social Security?

The Facts

Your SSI benefits will likely be affected if:

• You work for an employer who doesn’t withhold Social Security taxes from your salary. This can impact your retirement or disability pension. AND

• You’ve worked for another employer who did hold back Social Security retirement or disability benefits.

• You’re a public-school teacher. Most public-school teachers do not pay into SSI.

The Windfall Elimination Provision can also apply if:

• You turned 62 after 1985 OR

• You became disabled after 1985 AND

• You first became eligible for a monthly pension based on work where you didn’t pay SS taxes after 1985. Even if you’re still working, this applies.

If you’re a federal employee, you’re affected if:

• You performed federal service under the Civil Service Retirement System (CSRS) after 1956.

***If you only performed federal service under a system such as the Federal Employees’ Retirement System (FERS), your SS benefits won’t be reduced. Social Security taxes are withheld for workers under FERS.***

The Windfall Elimination Provision does NOT apply if:

• You’re a federal worker that was first hired after 12/31/1983.

• You were employed on 12/31/1983 by a non-profit organization that didn’t withhold SS taxes from your pay at first, but then began withholding SS taxes.

• Your only pension is for railroad employment.

• The only work you performed for which you didn’t pay SS taxes was before 1957, or

• You have 30 or more years of substantial earnings under SS.

• The standard 90% factor doesn’t get reduced.

• On page 2 of the Windfall Elimination Provision breakdown, consult the chart listing substantial earnings for each year. As long as you make that amount or over, that year counts towards the 30 years. The second chart shows the percentage corresponding to how many years of substantial earnings you have.

***This doesn’t apply to survivors’ benefits. Benefits for widows and widowers may be reduced because of the Government Pension Offset.***

The Calculation

Your Social Security benefit is based on your average monthly earnings adjusted for average wage growth. These average earnings are separated into three amounts and these amounts are multiplied by three factors to calculate your full Primary Insurance Amount (PIA).

Your PIA is what you would receive if you chose to receive benefits at the normal retirement age, neither later nor earlier.

If you become eligible for retirement or disability benefits in 2018, these three factors are calculated:

1.) The first $895 of your average monthly earnings is multiplied by 90%

2.) The earnings between $895 and $5,397 are multiplied by 32%

3.) The remaining balance is multiplied by 15%

The sum of A, B, and C is your PIA, which is then decreased or increased depending on whether you start collecting benefits before or after the full retirement age (FRA).

Let’s look at some examples:

Example 1:

A worker retires at 66 (his full retirement age, FRA) in 2018 with average earnings of $6,000/month. The Windfall Elimination Provision (WEP) does not apply.

1.) $895 (first $895 of earnings) x 90% = $805.50

2.) $4,502 (next part of earnings between $895 and $5,397) x 32% = $1,440.64

3.) $603 (remaining balance) x 15% = $90.45

Total PIA = $2,336.59 per month

Example 2:

A worker retires at 66 (his FRA) in 2018 with average earnings of $6,000/month. In this case, the WEP applies as he had 10 years of substantial earnings and then the rest in CalSTRS-covered employment that didn’t withhold any SS taxes.

1.) $895 x 40% (see chart) = $358

2.) $4,502 x 32% = $1,440.64

3.) $603 (remaining balance) x 15% = $90.45

Total PIA = $1,889.09 per month

You can manually figure out your average monthly earnings by following this chart. However, due to its complexity, it’s easier to use the following calculators:

This chart that shows the maximum amount your benefit may be reduced because of WEP.

***

Even if retirement feels like it’s far away, it’s good to know this information now so you can make plans accordingly. So, remember the Windfall Elimination Provision . . . because the winds of change are upon us and retirement will be here before you know it!

Tags archive, pension, retirement

Local / State Employees

How to calculate your CalPERS retirement benefits

Post author By Y@DminG
Post date June 14, 2018
No Comments on How to calculate your CalPERS retirement benefits

How to Calculate your CalPERS retirement benefits

More than 1.6 million California public employees, retirees, and their families.

Managing one of the largest public pension funds in the US for that many people seems daunting, doesn’t it? And if you’re a recipient trying to calculate your retirement benefits, you may feel a bit lost. But terms like “benefit factor” and “final compensation” don’t have to be intimidating. Let’s break down the benefits, the variables, and get you informed and ready for retirement.

First off . . . when can you retire?

In most cases, you can retire at age 50 with 5 years of service credit. However, if all service credit was earned on or after January 1, 2013, you must wait two more years until the age of 52.

Start educating yourself now with the help of CalPERS tips and tutorials, and make sure to fill out a service retirement application within 120 days of your planned retirement date.

1. Calculating your Retirement Benefit

If you expected a formula, this won’t disappoint:

Unmodified Allowance = Service Credit x Benefit Factor x Final Compensation

First things first. Unmodified allowance is your highest benefit payable, that doesn’t include any benefit for any beneficiary. (More on beneficiary options below.)

Now, on to those variables . . .

a. Service Credit

This equals the total years of employment with a CalPERS employer. Other types of service credit may be added, such as sick leave and service credit purchased.

To earn a full year of service credit, you must work at least:

1,720 hours (for hourly pay employees)
215 days (for daily pay employees)
10 months full time (for monthly pay employees)

b. Benefit Factor (aka Age Factor)

The benefit factor is the percentage of final compensation for each year of service credit. It is based on your age at retirement and the retirement formula.

Access your retirement benefit formula chart to figure out your benefit factor or check with your personnel office. You can also check your CalPERS Annual Member Statement to verify your retirement formula.

Find your category below and click on the link to view how benefit factors increase depending on the retirement formulas. The tables illustrating the changes are towards the back, but the entire pamphlet for each member category is extremely helpful.

Local Miscellaneous Member Benefits

If you’re employed by a public agency or special district that has contracted with CalPERS, but you’re not involved in law enforcement, fire suppression, the protection of public safety, nor employed in a position designated by law as local safety.

Local Safety Member Benefits

If you’re employed by a public agency or special district that has contracted with CalPERS and you’re involved in law enforcement, fire suppression, the protection of public safety, or who are employed in a position designated by law as “local safety.”

School Member Benefits

If you’re employed in a classified position within the jurisdiction of a school employer, except:

local police
those who are covered under CalSTRS
those who work directly for the Los Angeles or San Diego County Superintendent of Schools
those employed under the jurisdiction of a Joint Powers Authority contract
eligible certified employees who elect to retain CalPERS membership

State Miscellaneous & Industrial Benefits

If you’re employed by the state and universities, but are not involved in law enforcement, fire suppression, the protection of public safety, or a position designated by law as industrial, patrol, peace officer/firefighter, or safety.

State industrial members are those who are employed by the California Department of Corrections and Rehabilitation or its Division of Juvenile Justice, other than state safety or peace officer/firefighter members.

State Safety Member Benefits

If you’re employed by the state and involved in law enforcement, fire suppression, the protection of public safety, or are employed in a position designated by law as “state safety.”

c. Final Compensation

The final compensation is the highest average annual compensation during any consecutive 12 or 36-month period of employment, depending on your collective bargaining agreement or employer contract. This may include special compensation.

*If your membership date is on or after January 1, 2013, there is a cap on the compensation used to calculate your benefit.

If your service is coordinated with Social Security, the compensation cap used to calculate your benefit is equal to the 2013 Social Security wage base, adjusted by the Consumer Price Index for All Urban Consumers: City Average. For 2017, the cap was $118,775.

If your service was not coordinated with Social Security, the compensation cap used to calculate your benefit is equal to 120% of the 2013 Social Security wage base, adjusted by the Consumer Price Index for All Urban Consumers: City Average. For 2017, the cap was $142,530.

The compensation limit is calculated based on the limit in effect for each calendar year included in the final compensation period.

Are you still with me? We’ve gone through the variables, so now we can calculate your retirement benefit! Remember:

Unmodified Allowance = Service Credit x Benefit Factor x Final Compensation

Let’s look at an example.

A local police officer retires at 60 with 30 years of service and $100k/year as his final compensation.

i. Calculate manually

Before technology changed everything, we had to do this stuff by hand. Using the 3% at 55 retirement formula (3% being his benefit factor), we review the chart on page 46 of his benefits breakdown to see that his chart maxes out at 90% of final compensation.

30 (service credits) x 3% (benefit factor) x $100,000 (final compensation)

= $90,000 unmodified allowance

***If you want a rough estimate of your final compensation, use a Time Value of Money calculator and follow the instructions here.***

ii. Use the CalPERS online calculator

But yes, technology has changed everything, and you have options to find this out:

Log into your my|CalPERS account to obtain an estimate that incorporates data your employer already reported to CalPERS. You can generate and save a variety of scenarios.

Use the CalPERS Retirement Estimate Calculator and enter your own data.

If you expect to retire within one year, you may request a CalPERS-generated retirement estimate through the Retirement Allowance Estimate Request.

The calculation we’ve been looking at is for unmodified allowance.

And if you want beneficiaries?

2. Choosing your Benefit Type

a. Unmodified Allowance

This is the highest monthly allowance paid for life with no benefit to your beneficiary. The formula we have followed throughout this article is for this option.

b. 100% Beneficiary Option 2 with Benefit Allowance Increase

One beneficiary will receive 100% of your monthly benefit upon your death for the rest of his/her lifetime. If your beneficiary dies before you, your benefit will increase to the Unmodified Allowance.

c. 50% Beneficiary Option 3 with Benefit Allowance Increase

One beneficiary will receive 50% of your monthly benefit upon your death for the rest of his/her lifetime. If your beneficiary dies before you, your benefit will increase to the Unmodified Allowance.

d. Flexible Beneficiary Option 4

You name one or more beneficiaries and specify a specific dollar or percentage to be paid to each one.

You made it! I hope I’ve helped make these murky waters a bit more navigable. And remember, there is plenty more information and resources out there to take you confidently to retirement. You’ve worked a long time to get there. Make sure you’re prepared!

Tags archive, pension, retirement

Teachers / Professors

How to calculate your CalSTRS retirement benefits

Post author By Y@DminG
Post date May 28, 2018
No Comments on How to calculate your CalSTRS retirement benefits

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.

CalSTRS 2% at 62:

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 2^nd 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!

Tags archive, pension, retirement

Small Business Owners

Retirement plans for small business owners

Post author By Y@DminG
Post date March 14, 2018
No Comments on Retirement plans for small business owners

A person drawing business plan pictures in a notebook.

Retirement Plans for Small Business Owners

Retirement. Just one word can elicit everything from excitement for those bucket-list vacations to the stress of planning for those golden years now while you’re working and able. Perhaps you’re more worried now about your child’s education, or paying for that dream condo in Los Angeles, but the truth is that nowadays more people are living longer, and fewer people are saving for retirement.

Did you know . . .?

The average retirement age is 63.
The average length of retirement is 18 years.
The average savings of a 50-year-old is $42,797.
Out of 100 people who start working at the age of 25, by the age of 65, 63% are dependent on Social Security, family and friends, or charity.

Click here for more information.

How can a retirement plan benefit me and my business?

If you’re a small business owner, you’re likely not only figuring out how to save for your own retirement, but how to provide benefits to your staff, too. And rightfully so! Having an employer retirement plan has been shown to help boost employee morale. Employees view retirement plans as an investment in their future by the company, so it helps attract talent and reduce employee turnover.
Click here for more information on benefits for your business.

And if you’re an employee, it’s never too soon (or too late!) to think about retirement. A little each year can go a long way, and allowances are even provided by the IRS to help you catch up if you’re older than 50.

Keep in mind:

Contributions can be made pre-tax, thereby reducing your taxable income. In this case, the funds in the plan grow tax-deferred.
Certain plans are eligible for Roth contributions which are contributed on an after-tax basis. In this case, earnings and qualified withdrawals are generally tax-free.
Compound interest, or essentially earning interest on interest, is an excellent tool in your favor.

What are the four main types of retirement plans?

Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA)
Simplified Employee Pension Plan (SEP IRA)
One-Participant (Solo) 401(k)
401(k)

The first three are typically for small businesses that have fewer than 100 employees. And although the 401(k) has historically been associated with larger businesses, it may still be a viable option.

Let’s go to the nuts and bolts of the plans:

SIMPLE IRA

This option is available only for businesses with fewer than 100 employees. An employee must have earned $5,000 or more during the preceding calendar year.
More information is available here and here on the SIMPLE IRA.

Benefits

Low cost and easy to set up
Employees can contribute pre-tax, thereby decreasing their tax liabilities
The employee is 100% vested meaning they have immediate access to the employer’s contributions

Rules & Limitations

The employer cannot have any other retirement plan set up through the business
The employer contributes on a pre-tax basis only
The employer is required to provide a match for participating employees with the following options:
- Matching 100% of employee contributions, generally up to 3% of the employee’s salary (see here for more information), or
- Contributing a fixed 2% percent of each eligible employee’s salary, regardless of whether or not the employee contributes
Maximum annual contribution: 100% of salary up to $12,500 + $5,000 catch-up (as of 2018) for participants ages 50 and over

SEP IRA

More information on the SEP IRA is available here.

Benefits

Low cost and easy to set up
You don’t have to contribute every year
The employee is 100% vested meaning they have immediate access to the employer’s contributions

Rules & Limitations

The employee must have worked for the employer 3 of the last 5 years and earned $600 during the year from the employer
Only the employer is allowed to make contributions
The employer contributes on a pre-tax basis only
The employer is required to contribute the same percentage of salary for all eligible employees. So if as an employer you contribute 20% to yourself, you must contribute 20% to all eligible employees
Maximum annual contribution: 25% of the employee’s compensation or $55,000, whichever is less (as of 2018)

See here and here for more information on rules and limitations

One-participant 401(k)

This option is only available for a business owner with no full-time employees other than the business owner(s) and their spouse(s).
More information on the one-participant 401(k) is available here.

Benefits

Low cost
The spouse can contribute if he/she earns income from the business
The business owner can contribute as an employer and an employee (see rules below)
Contributions can be either pre-tax, after-tax, or Roth depending on the plan documents
Loans and hardship withdrawals may be available

Rules & Limitations

This option has the same rules and requirements as any other 401(k) plan
Maximum annual contribution: no more than $55,000 not including catch-up contributions, or $61,000 with catch-up contributions (as of 2018)
- When contributing as an employee, annual contributions may be up to 100% of compensation or $18,500 + $6,000 catch-up for participants ages 50 and over, whichever is less (as of 2018)
- When contributing as an employer, you can contribute up to 25% of compensation or your net self-employment income

401(k)

More information on the 401(k) is available here and here

Benefits

Loans and hardship withdrawals may be available
Contributions can be either pre-tax, after-tax, or Roth depending on the plan documents
The employer can match the employee’s contributions

Rules & Limitations

With more complex compliance requirements, this plan has a higher cost than the other options
Employer contributions may be subject to a vesting schedule where the employee may have increasing access to the matching over a set period of time or full access after a set period of time
Maximum annual contribution: $18,500 with $6,000 catch-up for participants ages 50 and over (as of 2018)
Total (employee + employer) annual contribution is either 100% of participant’s compensation or $55,000 ($61,000 including catch-up contributions), whichever is less (as of 2018)

See here for more information on rules and limitations

Retirement doesn’t have to be a cause of stress. Speak with a financial planner if you’re unsure about what’s best for you, and start thinking more about that bucket list!

Tags archive, retirement, retirement plans