I have been meaning to talk a bit about how my CalPers pension works. The formula which will be used to calculate my benefit is:
Salary x Service Credit x Age Multiplier
The number used for "Salary" is the average of my highest 36 months. So each time I get a raise, it takes a full 36 months for the new salary to fully "bake" into the pension calculation. However, each month which goes by means a slightly higher "Salary" number.
The number used for "Service Credit" is my years of service in the CalPers system, calculated out to 3 digits past the decimal point. Every passing day in which I am an active employee increases my service credit slightly.
The number used for "Age Multiplier" is based on my age when I retire. I am in a "2% at 62" plan, which means that at age 62 my Age Multiplier is exactly 2. If I retire before age 62, my Age Multiplier will be less than 2; if I retire past age 62, my Age Multiplier will be more than 2.
I am already vested and am at least 50 years of age, which means that I can retire from CalPers at any time. However, my monthly pension payments will not begin until I reach age 62. I also have the option to forfeit my monthly pension and instead withdraw my contributions plus interest in a lump sum. One reason to consider opting for the lump sum is that because of the WEP (Windfall Elimination Provision), my eventual SS benefits will be reduced by half of the amount of my pension, up to the cap. For 2023, the cap is $557.50, meaning they cannot reduce my SS benefits more than by $557.50. When the time comes, I will have to calculate to determine which option is in my best interest. It seems to be that right now, the lump sum would be more beneficial. However, each passing day tips the scales slightly more in the favor of monthly pension payments.
If I were to retire today, my monthly pension payments would begin at age 62 and would be in the amount of $388.42. I would lose $194.21 in monthly SS benefits as a result. Or, I could opt for the lump sum which is currently 25k and change; there would be no reduction in SS benefits down the road.
If I were to work until age 62, my monthly pension benefit would be:
$5,916 x 11.7 x 2 = $1,384.50
Probably slightly more as I will likely enjoy a few cost of living raises between now and then.
So clearly, not a fortune, but when added to withdrawals from my nest egg and possibly a small monthly SS check, it will be enough to provide for my needs.
I had not wanted to work until age 62, but of course I will do what I need to do. So I just keep calculating, and when I reach the point I can afford to retire, I will know.
April 6th, 2023 at 05:03 am 1680757408
April 9th, 2023 at 09:23 pm 1681075397
Forfeiting your pension completely if you withdraw your contributions and interest is a hefty penalty! This is very different that PSERS (the Pennsylvania teachers retirement system), where, if a teacher withdraws all of his/her contributions & interest, the teacher RETAINS a pension, albeit one that is less than 2/3s what the pension would be without the withdrawal.
Given that you would be forfeiting your employer contributions AND that the evidence indicates that retirees who have guaranteed income sufficient to cover their basic needs are happier than retirees who are equally wealthy but who lack the guaranteed income, I would really think twice before opting for the lump sum. Even if you theoretically could earn more by taking the lump sum and investing it, what is the chance that you would leave that lump sum there to accrue the earnings? If you spend the money, it's not earning.
In retirement, what matters is stability of *income*, not your net worth or how big your "retirement pot" is. Fundamental mindset shift!