Colorado PERA Retirement Options 1, 2 and 3

Most Colorado educators are generally aware of the formula that calculates their PERA pension benefit:

Years of Service Credit x 2.5% x Highest Average Salary (HAS)

They also are generally aware of which HAS Table they use so they know when they qualify for a “full” retirement (non-green-shaded areas of your HAS Table).

If you are unfamiliar with either of these things, make sure you investigate further before continuing with this post.

But many educators are not fully aware that they have to choose one of three benefit options when they retire. These options differ in the monthly benefit they pay to you and the benefit (if any) they pay to your cobeneficiary if you die first (typically a spouse, but it doesn’t have to be).

• Option 1: This pays you a lifetime monthly benefit as calculated by the formula. When you die, your monthly payment will stop and your beneficiary will receive nothing. (Unless you die fairly soon after retiring and you still have a remaining balance in your DB account, in which case they will get that remaining balance as a lump sum plus a 100% match. It typically only takes a few years for your monthly benefit to exhaust the portion of your DB account that you contributed.)
  
  
• Option 2: This pays you a lifetime monthly benefit which is slightly lower than what is calculated by the formula. The reason for this is that when you die, your cobeneficiary will continue to receive 50% of your monthly benefit for the rest of their life. How much lower your monthly benefit will be than the Option 1 level depends on your age and the age of your cobeneficiary. Take a look at this spreadsheet for the current Option 2 factors (these factors periodically change as actuarial assumptions change). If your cobeneficiary predeceases you, then your benefit will “pop up” back to the Option 1 level.
  
  
• Option 3: This pays you a lifetime monthly benefit which is lower than what is calculated by the formula (and slightly lower than the Option 2 benefit). The reason for this is that when you die, your cobeneficiary will continue to receive 100% of your monthly benefit for the rest of their life. How much lower your monthly benefit will be than the Option 1 level depends on your age and the age of your cobeneficiary. Take a look at this spreadsheet for the current Option 3 factors (these factors periodically change as actuarial assumptions change). If your cobeneficiary predeceases you, then your benefit will “pop up” back to the Option 1 level.

To help illustrate this, let’s look at a specific example of a 58 year old teacher who uses HAS Table 2, has 34 years of service credit, their Highest Average Salary (HAS) is $90,000, and their cobeneficiary is 60 years old.

• Option 1 Benefit: 34 x 2.5% x $90,000 = $76,500 yearly benefit ($6,375/month). When they die, the monthly benefit stops.
  
  
• Option 2 Benefit: $76,500 x 0.961847 (Option 2 factor) = $73,581 yearly benefit ($6,132/month). If they die before their cobeneficiary, their cobeneficiary continues to receive $3,066/month for the rest of their life. If their cobeneficiary predeceases them, their monthly benefit pops back up to $6,375/month.
  
  
• Option 3 Benefit: $76,500 x 0.915142 (Option 3 factor) = $70,008 yearly benefit ($5,834/month). If they die before their cobeneficiary, their cobeneficiary continues to receive $5,834/month for the rest of their life. If their cobeneficiary predeceases them, their monthly benefit pops back up to $6,375/month.
  

Option	Member Yearly Benefit	Member Monthly Benefit	Cobeneficiary Monthly Benefit (if you die first)
Option 1	$76,500	$6,375	$0
Option 2	$73,582	$6,132	$3,066
Option 3	$70,008	$5,834	$5,834

Which option you choose obviously depends on a lot of circumstances in your life, including (but not limited to) the relative ages of you and your cobeneficiary, the health of you and your cobeneficiary, any retirement your cobeneficiary has, how much savings you have in other accounts that you can draw from, your spending needs, and your values. While this is obviously an important choice, it’s not one you have to make until you are retiring, at which point you typically have at least some insight into all of these factors.