“Pensions are not what they used to be”- Many a Retiree Today.

Cutting quickly to the cold hard truth- the retirement income you are expecting may not be as bountiful as it appears. In the state of Colorado, new legislation will return  Public Employee Retirement Association (PERA) to full funding. Under Senate Bill 18-200, the severe shortage that was expected in the next 20-30 years will be corrected. While we hate to see benefits lessened for our friends, we agree a balanced budget is a good thing. All in all, its bitter medicine, but it is probably what was needed to cure the disease. Here’s what you can expect:

Current and Future Retiree Benefits Eroded over Time

There will be no cost of living adjustment (COLA)  for 2018 nor 2019. Moving forward, the annual COLA will have a cap of 1.5%, previously 2%. This is the only change in the plan for current retirees, but it will significantly reduce the value of their pension in the long term. If we consider what this translates to in 20 years, the 2018-19 pause and permanent COLA  reduction devalues one’s pension by over 14% from present. A 1.5% COLA lags long term inflation estimates of 2.3%, and retirees will have to make up the difference out of their own pockets or decrease their standard of living accordingly.

Current Employees will be further Impacted

  • If you are not vested in PERA by 2020, your Highest Average Salary (HAS) calculation will now be based on 5 years, rather than 3, of your highest earnings. You might expect this to reduce your initial benefit by about 4%. The change in HAS calculation may have an even greater effect on those who get a promotion or substantial raise, or who go from part-time to full-time late in their career.
  • Employee contributions will increase gradually, increasing from 8% now to 10% by 2021. This amounts to a 2% cut in your take home pay.
  • The waiting period for when you receive your first COLA will now be three years, rather than one. This effectively diminishes your pension by 3% over the long run. It will also hurt your ability to keep up with inflation right off that bat when you begin to collect.

Others Affected

  • Future Employees will have increased age and service requirements starting for anyone hired after January 1, 2020. With respect to age, most new hires (not state troopers and some other special categories) will need to reach age 65 to receive a full pension, versus the current 62.
  • State and employer contributions will also Of course, this is an expense all taxpayers will bear.

All of these actions will indeed make PERA more solvent in the long run. The question is whether they will make your own financial future secure as well?

So, what should you be doing today to prepare? First, every situation is unique. You should understand the impact as they relate to your own situation, and ask a professional if you have any unanswered questions. Some tips in the meantime include:

  1. Get your HAS as high as possible. This can include a promotion at the end of your career or switch to full-time if you are part-time. Of course, this now requires five years of advance planning rather than three.
  2. Previous PERA employees that only have a few years of service and do not intend to rejoin the system may be better off with rolling over their PERA account to a 401(k) or IRA today.
  3. Even if your initial PERA pension will meet all of your income needs immediately after you retire, inflation will erode its future value. If you expect to maintain your standard of living throughout retirement,  you should be saving now, and plan carefully to supplement your pension in  later years.

 

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Ken Jacobs CFP®, AIF®, CLU and Renee Morgan are investment advisor representatives of First Affirmative Financial Network (“First Affirmative”). Ken and Renee own an entity called Sustainable World Financial Advisors (SWFA) which is not affiliated with First Affirmative nor is it a registered entity. SWFA does not offer investment services, those services are offered by First Affirmative which is a Registered Investment Advisor (SEC File #801-56587). SWFA is a “doing business as” (DBA) name for use in its operations and should not be considered a registered entity offering investment services. The credentials CFP® & AIF® listed above bear trademarks. FAFN-Logo-(1)
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