Wayyy beyond the basics

In Three Reasons to Hug Your Pension and Why Pensions Are Your Last (Almost) Free Lunch, I covered the basics of educator pensions and then got into some weeds to help you better understand these old school retirement programs.

If you haven’t already read these posts, start there because in this post, I’m going to assume that you know the difference between a defined benefit and a defined contribution.

In this post, I’m going to crank pensions up to 11 to explore how to maximize both your contributions and benefits as part of an overall retirement strategy.

Want a million dollar pension?

Pensions are the envy of those who do not have them. As evidence, I offer you The Oregonian Public Employee Retirement Searchable Database. Since 2011, the Oregonian newspaper has published and publicized the pension benefits for almost all public employees (educators included).

In semi-regular articles, The Oregonian features/shames the top pension beneficiaries as well as calculating averages and medians each year. The favorite targets are those who have managed to maximize their pension benefits.

In the most recent update, the top beneficiary earned a monthly retirement benefit of $84,602. Given that this person’s last annual salary was $1,563,517 means that this person was definitely NOT an educator. At least not in K12 schools.

But scrolling down the first page of the database results, I found a person (initials WL) whose final salary was $135,321. This is a salary that a retiring administrator or teacher with seniority might manage. WL is earning a pension of $38,335 a month or $460,025 a year. That’s 340% of their final salary.

Most PERS beneficiaries receive far less. According to The Oregonian, “Pensions for beneficiaries who retired in 2023 ranged from about $1,100 annually to more than $200,000, with a median of $23,873, according to a newsroom analysis. The median benefit for 2023 retirees with 30 or more years, which PERS defines as a career employee, was $54,635 annually.”

To be fair to The Oregonian, the Oregon State PERS public pension program can be fairly criticized for one or more of the following. And thanks to Gemini AI, some of those criticisms include:

• Unfunded liabilities – sustaining benefits beyond what the program can fund
• Investment risks – underperforming and/or riskier investment of pension dollars
• Benefit changes – new or recent hires have significantly different (lower) benefits than in the past
• Complicated – due to original design and necessary changes, the program is one of the most complex in the United States

These issues have led to the lawsuits and legislation which have required taxpayers to help sustain Oregon’s PERS program. But both the Oregon Legislature and Oregon Supreme Court have, to date, largely protected public employee and retiree benefits, albeit at taxpayer expense and with reduced benefits and increasing complexity.

In full disclosure, my spouse will soon be part of this database as she began her teaching career in Oregon and will soon begin receiving pension benefits from this program. But since she only taught for 8 years in Oregon more than two decades ago, she will NOT be featured on the first pages of this database.

WL is an FIE

Since I’m among educators, I’m going to get a little partisan here.

Well played, WL.

You definitely had financial intelligence in order to figure out the byzantine PERS system and maximize your pension benefits. I Googled this person and found that he is an emeritus professor at Oregon State University. By my definition he is an FIE, a Financially Independent Educator!

For those readers who are not educators (or public employees), I can empathize with your frustration with the Oregon PERS retirement program.

AND, as educators, we cannot be faulted for seeking to get the most out of whatever pension program we have access to. I’m pretty sure you’d do the same.

While this post may not help you yield the same insanely impressive benefits featured on the first page of The Oregonian PERS pension database, it will help you identify what you might do to make the most of what your pension program can offer.

Read the fine print

I’m just going to be blunt. Public employee retirement websites range from boring to Kafkaesque in their complexity. And most school districts and systems offer little or no guidance or support for educators who want to learn about retirement and investing beyond a sad link to the aforementioned crappy pension website.

Recognizing this, some pension programs have contracted with external financial and investment provides to offer improved user experiences. Unfortunately, beyond zhushing up your financial data, these sites are just as confusing and frustrating. In some cases, they’re worse. I’m looking at you, Voya.

In the words of Randy Newman, “It’s a jungle out there….” So if you want to want to hack your pension, you’ll have to do the work yourself. And taking the time to better understand how your pension program works is time well spent.

In order to do so, you’re going to have navigate some overlong documents, inane videos and listen to elevator music as you wait to speak to a representative. But the only places you’ll find definitive information about the unique features of your pension are in places like these.

• Online videos and guides range from animated overviews to multi-page handbooks. But because every pension program is unique (and includes multiple plans or tiers), the only way you can get definitive and current information about your program is through these resources.
• Webinars are online informational presentations about the pension program or topics related to retirement planning. While these rarely offer you the opportunity for a 1:1 consultation, you can often get answers to your basic questions.
• Retirement information and planning workshops are formal online or in-person professional development sessions to help educators understand pension programs and how to plan for retirement. These may be offered by the pension program, your school district or an educational service district.
• Calling the pension program directly may involve waiting while Muzak plays in the background, but can often help you get more specific answers to questions and/or allow you to review your pension account with an expert. Some programs offer a secure messaging function, but I’ve found a call to be far more efficient.

As I mentioned above, some pension programs have contracted with external financial service providers to ‘enhance’ the user experience. (A clue is when you’re redirected from the pension website to another.) While some of the features of these external services may be useful, don’t trust any calculations or guidance that doesn’t come from the actual pension program website or documents themselves. Warm up your pdf reader now.

Is it worth the effort? Just ask Professor WL. He’s laughing all the way to the bank.

Caveat emptor

Because the internet remains a dangerous place, you will need to be vigilant in your online research and exploration. In addition to the usual threats of identify theft and scams, sponsored links for financial services can lead you away from accurate and trusted information about your pension.

Don’t let this dissuade you from from becoming a financially intelligent and independent educator. Just mind your Ps and Qs when it comes to paying attention to website addresses, sharing personal information, and keeping your passwords and usernames secure.

Gotta match?

In the private sector, many companies offer matching programs for 401(k) and other retirement investments as an incentive to save for the future. Up to a certain limit, employers will match contributions to certain retirement plans that the employee might make. While these are rare in public education, we had a version of this when my wife and I taught at an international school in Brussels.

For most educators, your paycheck will likely show a combination of both employer and employee contributions to the pension program. But unlike the private sector, these are likely automatic and based on some kind of formula defined by the pension program, district policy, or educator contract. In other words, you don’t have much of a choice.

However, because many pensions are hybrid programs that include both defined benefit and defined contribution components, there is often choice involved in terms of how much an employee can contribute to these complementary tax-advantaged funds.

My Washington State retirement plan only includes defined benefits. As such, I cannot change much about the inputs other than making more money or working more years.

My wife’s newer Washington plan is a hybrid which includes a defined contribution component. She is able to define a percentage of her income to be invested in the funds which she’s selected. In Washington, there is a minimum percentage and educators can elect to increase this if they wish. In other states, this amount is fixed.

While each state and program is different, it’s worth researching to see if what your options are. If there is any opportunity for your employer to match your contributions, take it. It’s free money for your future. And if you have choice in how much you contribute to your defined contribution plan, max that out if you can. It’s an easy way to fast track your path to financial independence and a choice retirement. And it will ‘cost’ less than you think!

Why? Because your contributions are pre-tax, the hit on your take-home pay is less than what you might think it is. You will pay less in federal and state taxes. And after a paycheck or two, you’ll forget about the extra hundred dollars each month. Until you start seeing your retirement balances grow.

If you want to calculate this for yourself, this nifty calculator will show you how your contributions affect your take-home pay and future retirement balances. (And no, I’m not getting any compensation from this company. )

Buying time

Like airline affinity programs which allow you to purchase miles (in lieu of flying miles), some pension programs offer you the opportunity to purchase service time. This can be used to supplement earned service time which can translate to a larger benefit in the future.

According to Investopedia, “Purchased service is a tactic that may be beneficial to a qualified individual for a variety of reasons. This option can help the individual meet the minimum time period required to qualify for retirement benefits, or allow them to step up from a level of partial benefits to the full benefit designation. In addition, this may be a way for the participant to increase their lifetime monthly payment amount.”

Because my wife and I taught for two years at an international school, there were service gaps in our pension earning histories here in the States. I researched purchasing service credit and found that the cost (high) didn’t pencil out for us. Like annuities, purchasing service credit requires a large investment in exchange for a lifetime of benefits. Our experience aside, depending on your situation and education career, this is another option worth investigating.

If interested and your pension program offers it, you will likely find either an online calculator or opportunity to get a quote from the pension service.

Vanilla or Chunky Monkey?

As I am in the process of navigating the Oregon State PERS retirement system for my spouse (and learning about public employees who have hit the pension jackpot), I can’t help comparing it with the Washington program that I’m more familiar with. The contrast between the two couldn’t be more stark.

Vanilla

In Washington State, the teacher retirement system is far simpler. For all practical purposes, there are just two programs — Plan 2 and Plan 3. (There is a Plan 1, but to qualify, you had to have started teaching before October 1, 1977.)

Like Plan 1, Plan 2 only includes a defined benefit. Plan 3 has a reduced defined benefit plus a basic defined contribution component. Both plans are relatively straightforward with regard to contributions and distributions. And both have cut and dried ages and conditions for qualifying for benefits. Aside from maxing out defined contributions, there isn’t much opportunity for tuning your pension savings or distributions.

Chunky Monkey

In Oregon, the public employee retirement system is like a Rube Goldberg contraption — making what was once a relatively simple pension program into an impossibly complicated array of chutes, ladders, and hidden caches.

But there is opportunity in the chaos. As the Oregonian and Professor WL prove, with planning and strategy, some retirement programs offer ways to generate exceptional pension benefits.

Professor WL engineered a pension benefit that was 340% of his final salary. While most newer hires won’t be able to squeeze out those kind of returns, if you’re in the right state and the right place in your education career, you might be able to land an outsized pension with some research and effort.

In my initial scan, I found that some states have relatively simple ‘vanilla’ pension programs (like Washington) and a handful of states have ‘Ben and Jerry’s Chunky Monkey’ programs like Oregon and California.

Given this diversity and complexity of pension programs across the U.S., you’ll have to do the research yourself. My recommendation is to spend some time with your pension website to figure out if and how you can tweak the system to maximize your contributions and/or benefits.

Pay me now or pay me forever*

*until you and/or your beneficiary dies

Eventually, you will stop contributing to your pension and start collecting benefits. Using some strategery here is essential. While some programs offer a short grace period, once you select your distribution option, you will be unable to make changes once you begin receiving benefits. As such, it’s locked for life (or death).

Speaking of death, we have to get honest here. While retirement is something to look forward to and embrace, it also involves looking mortality in the face. You will die in retirement. (If you don’t die before you reach retirement.) There, I said it.

Your pension distribution options will include at least three types of options. All of these are based on actuarial calculations (bets) on when you or others will die.

Option 1 – Pay me ’til I’m gone

The first option seems to be called something different in every state. In Washington State, it’s called ‘Single Life.’ In California, it’s called ‘Member-Only Benefit.’ It’s the simplest option and the one which pays the highest benefit — because it only pays you during your lifetime. You receive a monthly pension benefit until you breathe your last breath.

If you are married or in a domestic partnership arrangement, you are likely unable to select this option without your spouse or partner’s consent. But if you’re single or formerly married, this might be your ticket to ride.

Option 2 – For love or money

Virtually all pension programs offer some kind of survivor or beneficiary option which sustains pension benefit payments after you die. More often than not, this could be a spouse or partner. But each program and state has different rules and options for who can be designated as a survivor beneficiary.

Because these beneficiary elections lengthen the duration that the pension program must pay benefits, these options will reduce the amount you receive each month. While it’s easy to focus on the larger amount offered by the single life option, if you have a spouse or partner, particularly one who is younger or more likely to live longer than you, a slightly smaller benefit paid for a longer period easily makes up for that difference.

Pension programs will offer multiple options in this category with varying survivor benefits and/or durations. Depending on your pension program, the options in this category can cause your eyes to cross with seemingly infinite scenarios and percentages.

For me, it’s an easy choice. As I shared in other posts, my father opted for a plan in which 100% of his benefits continued being paid to my mother after he died. Assuming my wife and I are both still around when we begin claiming retirement benefits, I will follow my dad’s lead and go with the 100% survivorship option. It’s guaranteed money for life — mine and my spouse’s.

Option 3 – Take the money and run

The last options offer ways to withdraw your pension in a lump-sum, forgoing lifetime payments for a single (or multiple) distributions. These lump-sum distributions usually offer a few options for getting your money.

• Direct distribution – you get a check (and eventually a tax bill). Depending on your age and the program, this distribution may also trigger other tax penalties. Remember that pension benefits are treated as regular income, just like your paycheck.
• Rollover – you transfer the money to another tax-advantaged program like a 403(b) or 457(b) plan. After filling out some forms and clicking some buttons, your money moves out of the pension program into an approved retirement fund.
• Annuity – you transfer or convert your distribution into an annuity offered by the pension program or an external provider.

While there are proponents of taking the money out the pension and then investing it on your own, there are very few cost-effective ways to get guaranteed income in retirement.

Easy money for your lifetime

Again, I fail to see the value in withdrawing the money from your pension. Here are a few reasons.

Reason 1: You will almost always lose the value of the employer contributions to your pension. While you get what you’ve paid into it, there is often a lot of money or value that your employer has contributed which you’ll leave on the table.

Reason 2: Adults who do not have pensions are increasingly investing in annuities which aim to emulate the lifetime payments offered by pensions. But more often than not, these annuities are more expensive and complicated than the pensions they seek to replicate.

In my humble opinion, if you are vested, keep your pension intact and let them pay you for the rest of your (and perhaps your partner’s) life. Even if it’s a small payment, it’s going to be there every month you spend in retirement.

Place your bets

In reviewing various educator pension programs, I found that complexity is the norm when it comes to benefit distribution options. Whether it’s California, Oregon, or Ohio, each program offers too many choices for distributing pension benefits.

Most of these options mash up percentages, timelines, and scenarios which, when you look at them, don’t change the amount you get each month that much.

But all of them ask you to place a one-time bet that you can predict the future, or more specifically, when you and others might die.

For me, it’s easy. Because we have other income streams and investments, I can happily trade a slightly smaller monthly payment for two lifetimes of guaranteed retirement benefits. This is why having a four legged retirement plan in place is so important. Our pensions are just a few of the assets we have in place to provide for us in retirement.

For you, I recommend researching the options that your program offers and if necessary, discussing these with someone from your pension program. If you’re married, chat with your spouse or partner and consider what retirement assets and resources they have. If you are married or partnered, your pension will be part of a shared set of retirement assets and income flows.

But don’t let the complexity of these choices paralyze you. The good news is that you’ll only have to make this decision once. And then you can start spending your pension benefits!

You. Can. Do. This.

Now

1. Review almost everything you can find about your specific pension program and plan.
2. Talk to other educators or retirees who have the same pension program as you to find out if there are any tips or tricks to know.
3. Generate a list of questions and confusions that aren’t resolved after your reading and viewing.
4. Locate and attend an online or in-person pension information or training session.

Next

1. Identify your options for increasing the value or balance of your pension.
2. Review your current finances to see if you can afford to take advantages of these options. (You can.)
3. Implement these changes now, because in most cases, the sooner you take action, the more you’ll get when it comes time to receive benefits.
4. Begin exploring what distribution options you will have in your pension program. Use this information to begin planning a retirement strategy alongside your other assets and investments.