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.


Yearly Benefit

Monthly Benefit
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.

Health Insurance: PERACare vs. the ACA Marketplace

First, a caveat. Health care – and health insurance – are complicated and nuanced topics that are heavily influenced by individual circumstances and options. The following post should be generally applicable for folks who are in a similar situation as we are, but you should always investigate the particulars for your situation carefully. This post is not designed to be a comprehensive look at this topic.

An important consideration – and worry – for folks when they retire is health insurance. This is especially true if you retire before the age of 65 when Medicare kicks in. Health insurance itself can be very expensive, and a major medical condition can have a dramatic impact on your financial situation even with health insurance. Colorado PERA retirees have an important benefit in addition to their defined benefit pension – PERACare. (They also offer dental and vision insurance if you want it.) PERACare is health insurance that PERA retirees can get through PERA. It is guaranteed issuance (which was very important before the Affordable Care Act, and still nice now) and is even partially subsidized as part of your retirement benefit. But it’s still pretty expensive.

For my family, we need coverage for three: myself, my wife (also a PERA retiree, so we get two subsidies), and our daughter who is in college and is considered our dependent. Our cost for the Kaiser High Deductible Health Plan ($3,500 individual, $7,000 family deductible; $6,050/$12,100 max yearly out of pocket) is $1,654 per month, which is almost $20,000 per year (and that’s after $460/month, $5,400/year in subsidies). (Dental and vision cost an additional $140/month, $1,680/year). Obviously, that’s a significant amount of money – plus whatever out of pocket costs we have (note the high deductible) and, for those who have smaller pensions than we do, can be financially crippling. But I still consider us lucky to have the option because so many other people do not.

Before the Affordable Care Act (ACA), folks who didn’t have an option such as this either had to get coverage under their working spouse’s plan, pay for a very expensive policy on their own (assuming they could even qualify for a policy), or simply go without. The ACA was a huge improvement, guaranteeing issuance and offering plans at a variety of premium levels and coverage levels. And, for folks at the lower end of the income scale (up to 400% of the federal poverty level), your costs were at least partially subsidized. The cost of your premiums were capped at a certain percentage of your income (see the left side of the table below), with very large subsidies if you were on the very low income end, and gradually tapering off to fairly small subsidies the closer you got to 400% of poverty level. But once you crossed the 400% of poverty level cliff, the subsidies dropped to $0.


Prior to this year, our income – like many PERA retirees – was too high to receive any subsidies, so the cost of plans through the ACA marketplace was higher than our (subsidized) cost through PERACare. So when we retired, we signed up for PERACare. But then this year the current administration passed the American Rescue Plan Act, which did many, many things, one of which was a huge change in the ACA subsidies. For all the folks up to 400% of poverty level, the subsidies increased dramatically (see the right side of the table above), and – for the first time – there is a subsidy for those making above 400% of poverty level. Which includes us. Which is the reason for this post.

Note: While the subsidy theoretically exists no matter how high your income, it effectively phases out for higher incomes because the cap is at 8.5% of your income, and eventually that exceeds the base level premium for ACA insurance.

While I was generally aware of the change in subsidies when the American Rescue Plan Act passed, I didn’t really take the time to do the math for our situation until I read this blog post. Now, I really should have already figured this out on my own because I knew all the information, but it’s one of those things that just didn’t sink in enough to make me do the work to figure it out (not that it was that much work). As you’ll see shortly, that’s going to end up costing me several thousand dollars in premium savings for the months that I didn’t take advantage of this. The reason for this post is to share this information in case this post ends up being the one that makes you do the work to figure it out.

Note: The amount of subsidy you get for an ACA marketplace plan is based on your Modified Adjusted Gross Income (MAGI) for the 2021 tax year. Technically, the subsidy is a tax credit you get when you file your 2021 taxes, but they let you estimate what your income is going to be and reduce your monthly premium throughout the entire year, then there is a “true up” when you file your taxes. So it’s important to do a fairly good job of estimating your 2021 MAGI so you don’t end up underestimating your income, which will result in overestimating your subsidy and you could end up with an unwelcome tax bill next spring. This can affect other decisions you might make during 2021, like withdrawing from your pre-tax retirement accounts or doing a Roth conversion, both of which will increase your MAGI and therefore reduce your subsidy.

So, let’s take a look at the details. When you go into the ACA Marketplace (they are by state, here’s Colorado’s), you can enter in all your information and then it will list all of the different policies you can get, along with their premiums and coverage levels. Policies are generally grouped into Bronze (lowest premium, lowest coverage), Silver (medium premium, medium coverage, and the base for which subsidies are calculated on), or Gold (highest premiums, highest coverage). Because we’ve always been on Kaiser and like it, I then narrowed it down to Kaiser choices. And then from the Kaiser choices, narrowed it down to the two that qualify as high deductible health plans that qualify for a Health Savings Account (see this post for more on the value of HSAs).

So, with those parameters, my choices are a Bronze policy (KP CO Bronze 6500/35%/HSA) and a Silver policy (KP CO Silver 3500/20%/HSA). The Silver policy is very, very, very similar to the coverage I’m currently getting through PERACare (with PERACare having slightly better prescription drug pricing), so that’s pretty close to an apple-to-apples comparison. The cost (after subsidy) of the Silver policy for three of us through the ACA Marketplace? $1,326 per month. That’s a $328/month, or almost $4,000 per year savings over my PERACare policy, for essentially the same coverage. Wow.

But if I then consider the Bronze policy, which does have a higher deductible and a higher maximum yearly out of pocket cost, the premium drops to $996/month, which is almost a $7,900 per year savings over my PERACare policy (and a $330/month savings over the Silver policy through ACA). We are taking on more risk with the Bronze policy (because of the higher deductible and higher out of pocket max), but that will only affect us if we have a really bad year (and even then the premium savings covers about two-thirds of the difference). The vast majority of years (and hopefully every single one of them, we’ll come out ahead of the silver policy).

Normally open enrollment for ACA policies is in the fall (effective January 1st of the following year), but the American Rescue Plan Act extended open enrollment through August 15th. If we enroll now, our plan will start August 1st and last the rest of this calendar year (and we can drop our existing coverage through PERACare). (If I had been on the ball, I probably could have done this by May 1st, so we’ve missed out on 3 months of savings due to my inattention.) Then this fall, during open enrollment, I can choose to enroll in the same Bronze plan through the ACA marketplace (at whatever the 2022 rates are), switch to the Silver plan if we decide we want to, switch to any of the other ACA plans, or even switch back to PERACare. That’s an important point to keep in mind, you are making decisions one year at a time here. So if you figure out you made a poor decision, or if your health care needs change, you are only “stuck” with your current plan for the rest of that calendar year, and then you can change to a plan that better meets your need going forward.

So, if you are a Colorado PERA retiree, or any retiree who is getting health insurance from someplace other than the ACA Marketplace, it’s probably worth your time to explore the ACA plans, see what your costs might be after the new subsidies, and see if it might make sense to switch. (And, if you choose a plan that is HSA eligible, put those premium savings into your HSA until you max it out.)

Final Note: Currently the American Rescue Plan Act’s changes to the ACA marketplace are only in effect for 2021 and 2022. The current administration wants to make those changes permanent, but we’ll see what happens. If this is something you would like to see made permanent, contact your Congressperson and Senators.

Are the WEP and GPO “Fair”?

Like many teachers, the first time I heard about the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), my first response was, “That’s not fair!” Why should my Social Security benefit (by WEP) or Social Security Survivor’s Benefit (by GPO) be reduced simply because I worked as a public employee and earned a pension benefit? As with many things, once I learned a bit more I realized that the issue was a bit more complicated and nuanced than I first thought. The following are some brief thoughts about the WEP and GPO (but please realize these are complicated topics and this will not be a thorough exploration of either of them).

First, a reminder. When Social Security was created (in 1935), it was designed to be part of a “three-legged stool” to provide “economic security” to folks when they could no longer work. Those three legs were a company-provided pension plan (still relatively new at that point but very popular, even though many folks didn’t have one), Social Security (Title II portion), and the person’s own savings. It was never designed to be perfect, or to provide for a “comfortable” retirement as we think of it these days, but to alleviate poverty and suffering in old age.

“Security was attained in the earlier days through the interdependence of members of families upon each other and of the families within a small community upon each other. The complexities of great communities and of organized industry make less real these simple means of security. Therefore, we are compelled to employ the active interest of the Nation as a whole through government in order to encourage a greater security for each individual who composes it . . . This seeking for a greater measure of welfare and happiness does not indicate a change in values. It is rather a return to values lost in the course of our economic development and expansion . . .”

Franklin D. Roosevelt: Message of the President to Congress, June 8, 1934.

The Windfall Elimination Provision (WEP) is a provision of the Social Security rules that can reduce (but not eliminate) your Social Security benefit if you are eligible for a pension and did not pay into Social Security during the time you were earning that pension. This most often affects public employees (like teachers) in states where the pension plan is designed as a Social Security replacement plan. This is true of Colorado PERA and many other state plans, but not all state plans – some teachers pay into both their pension plan and Social Security simultaneously. For states where teachers pay into both, their pensions are typically much lower because they are designed to supplement Social Security (and the contributions they and their employers make to the plan are typically much lower). In states like Colorado where the pension is a replacement plan, the pension benefits are larger (as are the contributions), because the assumption is that you will not be receiving any Social Security, so therefore your pension – along with your savings – must be enough to live on in retirement.

Similarly, the Government Pension Offset (GPO) can reduce or eliminate Social Security Survivor’s Benefits. Some folks are eligible for Social Security benefits earned by their spouse if their spouse dies first, but if your pension (again, only if you also didn’t pay into Social Security simultaneously) is large enough, it can reduce or even completely eliminate those survivor benefits.

On first blush, this seems to be very unfair. Many teachers (and other public employees) work enough (typically forty quarters = 10 years of wages) under Social Security covered employment while in high school, college, and before, during and after their teaching careers to earn a Social Security benefit. If we pay into the system just like everyone else, why should our benefits be reduced simply because for some part of our career we also paid into another system? As it turns out, there is actually some really good logic behind this (although not everyone will agree), so let’s briefly take a look.

The first thing to keep in mind is that as long as you qualify for a Social Security benefit, WEP can reduce but not eliminate it. The maximum your benefit can be reduced by WEP is $480 per month (in 2020) and the reduction cannot exceed 50% of your pension benefit. Second, if you have 30 or more years of substantial Social Security covered earnings, WEP won’t affect your benefit at all. (If you have less than 30 years, the more years you have, the lower the WEP reduction is.) You can use this calculator (you have to enter in your yearly Social Security earnings) to estimate your benefit, or visit Open Social Security (where you enter in your PIA as calculated by Social Security).

So why does this provision exist? It’s because Social Security does not pay the same percentage of replacement income to everyone. Because it is designed as “social insurance” and to alleviate “poverty and suffering” in old age, it pays a higher percentage of one’s career average indexed earnings if you make less money, and a lower percentage if you make more. You can download the latest report (pdf) from Social Security, but the replacement percentage can be as high as 78% (for very low earners) to as low as (27% of the maximum Social Security covered wage, currently $142,800) for very high earners, with most folks earning in the 35-45% range.

Because of the way the formula is constructed, many folks who receive a public pension get treated like a very low wage earner and therefore get a higher benefit, even though they were not a very low wage earner. For example, let’s say you have eleven years of Social Security covered earnings and therefore qualify for a Social Security benefit. But those eleven years were mostly low-wage years, years you worked part-time in high school and college, and maybe summer jobs as a teacher. The Social Security formula then takes those eleven years of low earnings and adds in another twenty-four years of $0 earnings, as your benefit is based on your average indexed monthly earnings over the highest 35 years of earnings. To the formula, you look like someone who has made poverty level wages your entire life and, as a result, the formula will spit out a very high replacement percentage of those artificially low earnings.

The WEP formula simply tries to adjust that so that you earn a fair replacement percentage based on the wages you actually earned under Social Security. So while it feels like you are getting “penalized” for being a public employee and earning a pension, what’s really happening is that the WEP is trying to “adjust” for you getting a larger Social Security benefit than was designed.

GPO works the same way, except applied to your possible survivor benefit (survivor’s benefits were added in 1939, they were not part of the original Social Security Act) from your spouse. Survivor’s benefits were designed for families where only one spouse worked (paid work), or one spouse earns vastly more than the other. If the high earner dies first, the survivor’s benefit is designed to support the spouse who didn’t work for pay or worked for low wages. (Back in the day, this was often the stay-at-home Mom who worked very hard at home raising the family and running the household, but didn’t get paid to do that work. That still applies some today, but also includes stay-at-home Dads as well as folks who earn a lot less than their spouse or perhaps stay home for a few years.) Again, the formula for the survivor’s benefit incorrectly sees you as a low wage earner and spits out a higher benefit than intended, so the GPO tries to adjust for that.

There has often been legislation proposed to repeal the WEP and/or GPO, but it typically doesn’t get very far, both because of the faulty formula it is trying to adjust for and because of the impact on the federal budget. Right now there is legislation (pdf) before Congress that attempts to modify the WEP formula as there are cases where it adjusts incorrectly, and that has a much greater likelihood of passing (it also has a hold-harmless clause so that they use whichever formula – old or new – gives you the higher benefit).

While not everyone will agree, I generally think the WEP and GPO are fair to public employees in the context of how Social Security was designed and is implemented (especially if the formulas are adjusted by legislation to fix any incorrect adjustments). It’s a separate discussion whether pension plans as well as Social Security, Medicare and other safety-net programs are adequate in the first place.

Health Insurance and Using Your HSA as a Stealth Retirement Account

I’ve written a bit about health insurance before, going through the options for Littleton Public Schools (LPS) and Douglas County School District (DCSD). I was recently helping someone and thought I would update the numbers given LPS’s current insurance offerings, and also spend a bit more time talking about possibly using your HSA as an additional “stealth” retirement account.

First, a caveat: Health insurance is complicated and differences in individual circumstances as well as specific scenarios will vary. These are some “generic” examples that give you an idea of ways you can compare plans, but will not cover every circumstance.

LPS currently offers four choices for health insurance: CIGNA OAP, CIGNA CDHP, Kaiser DHMO, and Kaiser HDHP. The CIGNA CDHP and Kaiser HDHP both qualify as high-deductible plans, so you are eligible for an HSA, and the district contributes $1,250 a year into your HSA for employee only coverage, or $1,700 a year for any dependent care coverage. The following table summarizes the yearly premiums for each plan as well as the deductibles, coinsurance and maximum out-of-pocket expenses you could have.

The table below allows you to compare CIGNA OAP with CIGNA CDHP with HSA, and then Kaiser DHMO with Kaiser HDHP with HSA (and, of course, then CIGNA to Kaiser). The examples I chose for illustrative purposes are $2,000 a year in charges if you have individual coverage and $4,000 if you are covering any dependents. The total out of pocket listed in the tables is comprised of the total you pay in premiums, plus any out of pocket costs, minus the district contribution to your HSA if you choose one of the HDHP plans ($1,250/year for individual, $1,700 for any dependent coverage).

Note that these are rough estimates – for simplicity’s sake it just assumes you pay the 20% coinsurance after the deductible – but that totally depends on what services you need, so your exact total could differ (but it should be a pretty good estimate for comparison’s sake). You can do the math (or contact me and I’m happy to help) for amounts different from the $2,000/$4,000 examples. Also keep in mind that if you have expensive prescription drugs, that could change the calculations (because you typically pay for those out of your deductible in HDHP plans). Finally, keep in mind that you may – or may not – be having health care premiums taken out pre-tax (and pre-PERA), so that can impact your overall totals as well (but they are still directionally accurate).

In general, there are very few scenarios where the high deductible plans are going to cost you more (mostly involving expensive specialty prescription drugs). And even if in one given year it costs you more, you’ll likely more than make up for it in the “normal” or even “good” years where you spend less. Another important consideration to keep in mind with the HDHP plans is that if you don’t spend what is in your HSA (either contributed by the district or additional pre-tax dollars contributed by you), that money rolls over for future years (so you have the potential of $1,250/$1,700 from the district plus your own contributions to the HSA to rollover each year, plus any investment gains over time). So in years where you have lower expenses, the savings from an HDHP plan are even greater than shown above (because your premium costs are the same no matter how much care you get, but your out-of-pocket costs vary with how much you use the plan).

As you can see, for these examples ($2,000/$4,000 in costs), the high-deductible plans come out much better and, not surprisingly, Kaiser comes out better than CIGNA. (And, in years where you spend much less than $2,000/$4,000, the high deductible plans will come out even better.) In general, the only reason to go with CIGNA over Kaiser is if you already have an established relationship with a doctor with CIGNA and don’t want to lose that relationship. And there’s very few circumstances where it makes sense to go with the OAP or DHMO over the high-deductible plans.

If you do go with a high-deductible plan, then there’s a strategy to really supercharge your HSA. HSAs are designed to help you pay for health care costs with pre-tax dollars (not just pre-federal and state, but pre-FICA as well, but not pre-PERA). Similar to an FSA, they allow you to reimburse yourself for health care costs out of your HSA. Unlike an FSA, however, the entire balance in your HSA can rollover from year to year if you don’t spend it, the total amount you can contribute each year is higher, and you can invest the money in your HSA if you choose (typically there is a minimum threshold you have to keep in cash, but then you can invest any amounts above that).

So, while most folks use the HSA to reimburse themselves as they incur health care expenses, the ideal scenario is that you start with an HDHP with HSA when you are young (although this works for any age pre-Medicare), but do not reimburse yourself from the HSA (just pay from your checking account). Instead, invest the money in the HSA and use it like a stealth retirement account. This assumes, of course, that you can afford to contribute to your HSA while still paying any out-of-pocket health care costs out of your regular cash flow. (You can keep track of your health care expenses over time and reimburse yourself at any time, even for costs incurred in the past, as long as they occurred while you were enrolled in a high-deductible plan.)

The reason this is so powerful is that the money in your HSA never gets taxed (if you eventually use it for health care expenses), so it’s better than either a Traditional or a Roth 401k/403b/457/IRA. Ideally, you would max out your contributions to the HSA each year. For 2021, the limit is $3,600 for individuals or $7,200 for families (any dependent coverage), with a $1,000 catch-up contribution if you’re 55 or older. Keep in mind this includes the employer contribution, so subtract off $1,250 for individual or $1,700 for any dependent coverage to find out what you can contribute yearly (divide by 12 for monthly contribution). (And, if your spouse has their own HDHP with HSA through their employer, make sure to subtract off their employer contribution plus anything your spouse is contributing to the HSA.)

Then, once you’ve met the minimum that your HSA provider requires to be kept in cash (typically in the $100 – $2,000 range), you can set up an “automatic sweep” of any additional contributions into your investment account. You typically have a wide range of investment choices through someone like TD Ameritrade, so you can invest in low-cost, diversified index funds. Over time that money will grow and, again, will never be taxed. (Note that it is never taxed as long as you eventually use it for health care expenses. Once you turn 65, you can also use it for anything you want and pay taxes on it, but no penalty.)

In effect, you can use your HSA as another retirement account, in addition to your Traditional and/or Roth IRA, 401k, 403b or 457. But, unlike a traditional account (which is tax deferred, but you pay taxes when you withdraw), or a Roth account (which you pay taxes up front, but then withdrawals aren’t taxed), an HSA is never taxed (contributions are pre-tax, investment gains are tax free, and withdrawals are tax free). This is why HSAs should be near the top of your priority list for investing for retirement (second only to contributing to a 401k/403b/457 up to any employer match, and since most teachers don’t get an employer match, that makes HSAs your #1 priority).

So, let’s do a hypothetical to just give you an idea of what this could look like. Let’s take a 25-year old teacher just starting to contribute to their HSA. Let’s assume that in addition to the employer (district) contribution, they max out their HSA. Let’s also assume they have a spouse and therefore are able to contribute $7,200 per year into their HSA ($1,700 from the district, $5,500 from the teacher). For simplicity’s sake, we’ll ignore that the $7,200 will go up over time (and the current $1,000 catch-up provision once you and/or your spouse turn 55) and that they have to have a minimum amount kept in cash before they can invest (that will be more than made up for with the increases to the $7,200 limit in the future). We’ll assume they invest monthly in the Vanguard Total Stock Market Index Fund (VTSAX), and we’ll assume an 8% return per year. (Historically, the return would be higher than 8%, but going forward it may not be so going to be a bit conservative here.) We’ll assume they continue to invest $7,200 a year ($1,700 from their employer) for 40 years (until age 65, when they will be covered by Medicare), and then start withdrawing money for any accumulated or future health care expenses.

So, how much will they have at age 65? $1.8 million. Tax free (and the money has never been taxed). And it will continue to grow after that, since they are unlikely to pull the full $1.8 million right away. (And, at the historical return of closer to 10%, you’d have $3.2 million. Even at only 6%, you’d have over $1.1 million.)

Now, it may be unlikely that they’ll continue to teach until age 65, so they may lose the employer contribution before age 65. But, even if they do, they can still contribute up to the maximum with their own money, so the numbers still work. And given the fact that the $7,200 maximum per year goes up over time, and there’s the post-55 catch-up provisions, the final amount will likely be well over $2 million.

So, if you’re not currently using one of the high-deductible plans, consider switching. And consider maxing out your HSA each year and, to the best of your ability, paying for health care expenses out of your normal cash flow and let compound interest do its magic inside your HSA. This could end up being your best retirement account

Salary Schedule Lanes: How Much Difference Do They Really Make?

Many school districts have a salary schedule for teachers where your pay increases based on a combination of the number of years you have taught in the district (“steps”) and the educational level you attain (“lanes”). While steps are automatic (well, except for the occasional bad budget year where steps are frozen), lanes are dependent on whether teachers get additional education (and how much they get). Most teachers are aware that if they get additional education and move across the lanes they can increase their salary, but many may not know the huge difference that can make over time.

Again, inspired by a slide Ben Johnson created, I thought it might be helpful to take a look at Littleton Public Schools’ (LPS) salary schedule. LPS has a Schedule A and a Schedule B, with most folks (I believe) on Schedule B, but with Schedule A retained for some veteran teachers who it is more advantageous to stay on the older schedule (LPS pays you whichever schedule is higher for you). For this example, I’ll just focus on Schedule B.

While the salary schedule is generally “set” (at least until there is some kind of major negotiated change like when they added Schedule B), the schedule itself (usually) changes from year to year as each cell is inflated by a yearly increase to help offset inflation. I’ve created a spreadsheet that takes the current Schedule B and inflates future year salaries by 1% each year (as those increases have been rather sparse lately), but you can change that to a different amount if you wish (cell E2, outlined in purple). The first table in the spreadsheet shows what the (projected) salary will be for each step and lane for the next 40 years.

The second table (as you scroll to the right, beginning with Column N) shows the cumulative sum of the salaries in each lane. For example, if you look in cell P11, you’ll see that a teacher in the BA+40 lane will have a total cumulative salary of $368,598 after seven years of teaching. This assumes they are in that lane for all seven years (and that the 1% yearly increase in the schedule is accurate). An important point to keep in mind when looking at this spreadsheet is that very few teachers will remain in the same lane for their entire career (unless they are already at BA+40 or MA+90/DOC when they begin teaching). Because teachers have to complete continuing education credits to remain certified, it is almost a certainty that they will occasionally move horizontally across lanes.

But there is a hard break between BA+40 and MA. If you don’t get your Master’s degree, then you are “stuck” at BA+40, those continuing education credits don’t do you any good (in terms of salary, they obviously hopefully help you become a better teacher). Once you have your Masters, then you can continue moving lanes until you max out at MA+90 (or if you get a Doctorate).

The final table (as you scroll to the right, beginning with Column X) is the “difference” table. This shows the difference between the cumulative salaries in each lane as compared to the MA+90/DOC lane after 10, 20, 30 and 40 years of teaching. For example, here is the difference after 30 years of teaching:

So, after 30 years of teaching, you make about $1 million more (cumulatively) in the MA+90/DOC lane than in the BA lane. (And, likely a more helpful comparison, about $668,000 more if you compare BA+40 to MA+90/DOC).

As you scroll through the table, you’ll notice those numbers start to increase somewhat dramatically as you pass 10, 20, 30 and perhaps head toward 40 years. Again, a reminder that teachers will likely receive salaries in multiple lanes throughout their career, so these numbers won’t match anyone exactly (even if the 1% projected yearly increase was exactly right for 40 years). But it’s still very illustrative of the financial difference moving horizontally across the lanes (and moving horizontally as quickly as you can) can make (and getting your Master’s degree as quickly as you can.) I think focusing on the difference between the BA+40 column and the MA+90/DOC column (because of the hard break if you don’t get a Master’s degree) is probably the most impactful.

A couple of caveats, however. First, getting those additional hours is generally not free (especially getting a Master’s degree), so there is some cost associated with moving horizontally across lanes (but some of that cost is unavoidable, as you have to get recertification hours).

Second, money isn’t everything. Really. So having the time, opportunity and energy to pursue these additional hours has to fit into your life circumstances, as well as what you value and want to do with your life. So please don’t feel “shamed” if you haven’t moved across lanes or if you choose not to. This has to be part of the “good life” that you want to live.

With those caveats in mind, hopefully this spreadsheet shows you the financial impact moving across lanes can have and that will hopefully help inform your decision making. And one more thing, keep in mind that your PERA Defined Benefit is based on your highest average salary (either highest 3 or 5 years, depending on when your PERA membership started), so not only does moving across lanes increase your cumulative salary while you’re working, it continues to increase your cumulative retirement income once you start drawing that PERA benefit for the rest of your life (and possible your co-beneficiary’s life if you choose an Option 2 or Option 3 benefit).

Does this information spur you to accelerate moving across lanes? Or do you feel like you have “enough” and your time and energy is better spent elsewhere? Feel free to leave a comment below or reach out with questions or suggestions.

Fees Matter: Vanguard, PERA, TIAA and MetLife Comparison

Inspired by some of the work Ben Johnson has been doing, I decided to revisit two posts I’ve previously done on the retirement plans (401k/403b/457) available through Littleton Public Schools and Douglas County Public Schools. (Note that the expense ratios are slightly lower now than when I wrote those posts.)

It’s probably worth reading at least one of those posts for context, but I basically compared the fees you would pay for investing in PERA’s 401k/457 plan with those you would pay in the other vendor offered (TIAA for LPS, MetLife for DCSD). In this post I thought I’d take that a step further by showing the compounded effects of those fees over time, as well as throw in a comparison to an IRA at Vanguard.

Important note: IRA’s have much lower contribution limits than 401k/403b/457 ($6,000 vs. $19,500 if you are under the age of 50), so you can invest much more each year into your workplace plans. And there are also income limitations on whether you can contribute to an IRA, whereas there are no income limitations on 401k/403b/457 plans. And don’t forget the behavioral aspect – some folks need to have the money taken directly from their paycheck otherwise they won’t ever end up investing it.

So I created this spreadsheet to illustrate the impact of fees over time. Like all spreadsheets of this nature, it is based on many assumptions and those assumptions may be incorrect. Feel free to make a copy of the spreadsheet and change any of the assumptions you wish. For example, for the return on different asset classes, I put in the long-term compounded average return, but many folks think those will be lower in the future, so feel free to adjust. You also can adjust your asset mix between the different asset classes (I kept it fairly simple by limiting to US Large Cap Stocks, US Small/Mid Cap Stocks, International Stocks, US Bonds, and a Target Date fund choice.) Make sure the asset allocation mix adds up to 100%!

You can also change the initial amount you have invested (currently $0 in my examples) and the amount you are adding to your investment each year (currently $6,000 in my examples). You should not change the fees charged by Vanguard, PERA, TIAA or MetLife (unless you are reading this enough in the future that those have changed as well), nor the columns that keep track of your running totals with each vendor. Note that the fees for each are based on the lowest-cost fund offered within each asset class with each vendor.

You can change any of the numbers that are in cells with a purple outline, leave the rest alone.

So, let’s look at some selected results. First, what if you had an aggressive, all-equity allocation of 40% Large Cap, 30% Small/Mid Cap and 30% International? This is what it look like after 10 years:

As you can see, investing at Vanguard is going to get you the best overall return, and investing with PERA is going to be a better choice than either TIAA (LPS) or MetLife (DCSD).

How about after 30 years?

Wow. You’d have over $110,000 more in Vanguard than with MetLife, and over $90,000 more if you choose PERA over MetLife. And if you take it out to 50 years (think starting when you are 22 and not withdrawing until age 72 when you have to start taking Required Minimum Distributions):

Almost $1.5 million more in Vanguard than in MetLife, $1.2 million more with PERA than MetLife. (Note that these numbers get even further apart with contributions that are greater than $6,000 per year, although the percentage differences will be the same.)

Okay, well what if you just chose a Target Date fund (which is the default option in your 401k/403b/457 plans, and a good, simple choice for lots of folks) and put 100% of your money into that? Here’s after 10 years:

Note that here PERA is actually ahead of Vanguard due to the lower expense ratios on their Target Date funds, but both Vanguard and PERA are still doing much better than TIAA or MetLife.

30 years?

50 years?

Play around with the assumptions in the spreadsheet, including the asset mix that most closely reflects your desired asset allocation. But no matter what mix you choose, Vanguard and PERA will come out the best (usually Vanguard as the best, with PERA only if you go with just a Target Date fund). TIAA will come in a distant third, and MetLife a very distant last place. (And keep in mind that the negotiated fees with TIAA and MetLife are actually pretty good compared to many folks’ 403b choices around the country.)

And yet many employees in LPS and DCSD choose TIAA and MetLife. Why? Perhaps because a sales rep contacted them and was kind, concerned, and “helpful”. Perhaps because they think they can choose investments and “beat the market”. Or perhaps they just chose without much knowledge.

So, now that you know a bit more, what changes might you make with your investments? In general, if your adjusted gross income is not too high (varies depending on Traditional vs. Roth, and increases slightly each year), opening up an IRA at Vanguard is going to be your best choice to fund first (this is assuming you are disciplined enough to invest the money when it doesn’t come directly out of your paycheck).

If you max that out (remember, IRA’s have much lower contribution limits each year), then fund your PERA 401k or 457 next. In LPS, I would choose the 457 over the 401k, as it’s a bit easier to access the money before age 59.5 (unfortunately, DCSD has not chosen to offer the PERA 457), but otherwise the 401k and 457 are essentially the same.

If you are able to max out your personal IRA and your 401k or 457, then you can invest in the one you haven’t yet, as the 401k and 457 are different “buckets” and they each have their own, separate contribution limit (note that the 401k and 403b draw from the same contribution “bucket”). This means that in 2021 if you are under the age of 50 (if your income isn’t so high that you can’t contribute to an IRA), you can contribute up to $6,000 to an IRA, $19,500 to a 457, and another $19,500 to a 401k, for a total of $45,000. If you are 50 or older, you get “catch up” contributions, which gives you an extra $1,000 for your IRA and $6,500 for both the 401k and 457, for a total of $59,000. (And, depending your plan, there may be special catch up contribution provisions in your last 3 years of work that can let you contribute even more.) Keep in mind that for all of these you have the option of doing a Traditional (pre-tax) contribution or a Roth (post-tax) contribution, which is a complicated and entirely different conversation.

As always, feel free to reach out with questions (or comment below).

Free (for Federal Taxes) Alternative to TurboTax

Thanks to Courtney Petros, today I learned about FreeTaxUSA tax preparation software. We were discussing filing taxes and I mentioned that I used to file by hand using the paper forms, but when the IRS stopped mailing them I gave in and switched to TurboTax.

At the time, I think it was about $30 and I convinced myself that was okay. Since then the price has continued to go up (especially because I have a little bit of self-employment income which means I have to upgrade to a more expensive version of TurboTax). While the product itself is fine, I was still frustrated with the expense and the fact that we can’t file for free directly with the IRS.

Courtney said that she used FreeTaxUSA and, at least initially, it looks like a good alternative. (I already filed our taxes this year, so I haven’t used it myself yet, although I may go in and mess around with it later this week.) It appears to be easy to use, although with fewer bells and whistles than TurboTax, so you have to be reasonably confident about what you are doing. The big advantage, of course, is that it’s free. They do charge $14.99 to file your state taxes (I submit Colorado taxes for free through the Colorado state website), and the deluxe version of the federal return is $6.99 which gets you some additional support, which is how they make their money. They are an authorized IRS e-file provider, so they should be secure and legitimate.

I took a look at several reviews (specifically this one and this one and glanced at a few others), and they all seem to agree that it’s exactly what it purports to be and works well as long as you feel fairly confident about what you are doing.

So, I thought I’d share it for those of you who may not have completed your 2020 taxes yet, or who might want to explore using it in the future. If any of you have used it, please leave a comment below and share your experiences.

PERA Votes to Switch from Voya to Empower

The PERA Board voted, pending final contract negotiations, to switch record keepers for the Defined Contribution plans (which includes the 401k/457b plans) from Voya to Empower. Voya came in second place in the RFP process, and it would’ve been “fine” to continue with them, but staff, the consultant, and the Board all thought Empower would provide a better experience to members.

The fee each proposed is essentially identical (Empower was slight higher in their bid). I would suspect that it won’t change the fee structure for the plan/funds at all, but I don’t know that for sure as I don’t know how the proposed fee compares to the current fee. (Since PERA has consistently focused on lowering the fees, I would be surprised to see them go up, but we’ll see.)

I’ve shared screenshots of the two slides below as reference for the pros and cons of each. But, essentially, Empower appears to offer better service, more customized offerings, and better technology. Interestingly, Empower purchased Personal Capital last year and will be integrating that into the platform by year’s end. I think that has huge potential if it’s done correctly.

I also think it’s significant that the PERA staff ranked Empower higher, considering that makes more work for them as part of the conversion. Note that there was going to be a fair amount of work no matter what, because as part of this RFP PERA is going to transition away from single sign on (meaning you will no longer have to sign on to PERA’s website in order to get to Voya – soon Empower), and they will be aggregating the contribution data before it goes to the vendor (right now each employer sends their data to Voya, after this transition it will all get sent to PERA and PERA will send one file to Empower). But, even with that, there will be a ton of work in order to convert the data over and, of course, in communication.

I do not know the timeline of when this transition would actually happen, but my sense would be by the end of this calendar year. I’ll have to see the final details, of course, but at the moment I’m cautiously optimistic about this change.

BlockFi: A Possible Alternative to Low Yield Savings Accounts

I’ve been debating for a while whether to post this here because I will be discussing a much riskier, alternative investment. As someone who argues you should pretty much invest in diversified index funds and forget it (other than rebalancing), this is a bit uncomfortable. But I finally decided to post because many people have been asking if there are any alternatives to the very low interest rates savings accounts and CDs are paying, and I figure you can all do your due diligence to see if this might be right for you. I will include multiple caveats along the way, starting with this: this is a potentially risky investment and there is definitely the potential to lose money (50%, 70%, maybe even 100%). So, hopefully this disclaimer is clear :-).

I learned about BlockFi through the Animal Spirits Podcast. Michael and Ben first had Zac Prince (BlockFi CEO) on last November in this episode. They first discuss Bitcoin (BTC) and cryptocurrencies in general and then start discussing BlockFi specifically at the 16:20 mark. While I will try to briefly describe BlockFi below, you should definitely listen to this entire episode before deciding whether you might want to invest with BlockFi.

Because of the intense interest (pun intended) from listeners, Michael and Ben had Zac back on for some Q & A as part of Episode 180. Zac is on from 35:57 to 47:45, answering questions that listeners had submitted (as well as some from Michael and Ben). Again, highly recommend you listen to this before deciding to invest.

Finally, they had Zac back again at the end of January where the discussion was more about Bitcoin and crypto in general, and less about BlockFi. Still worth your time, but not as important as the first two.

So, what is BlockFi? Briefly (and overly simplified), BlockFi is a “fintech” company providing financial services. They have a retail side and an institutional side. The retail side allows you to invest money and buy and trade cryptocurrencies (like Bitcoin, Ethereum, etc.) and – the main point of this post – allows you to earn interest on what you’ve invested. The institutional side (which is what allows them to pay interest on the retail side) serves as a prime broker to large institutions (companies, endowments, etc.) who want to play in the crypto space but traditional banks won’t currently provide any financing for it. They have also recently added an institutional trading product. (Listen to the episodes, it explains it much better.)

The interest they earn from the money they lend to institutions allows them to pay interest to the retail accounts and they make money on the spread. Currently they can charge very high interest rates to institutions because there isn’t much competition and this is the only way for institutions to borrow for crypto purposes. This, in turn, allows them to pay very high interest rates to retail investors. They fully expect those rates to come down over time, but it will be a relatively slow process as the industry scales up.

So, what kind of interest rates? Well, it depends on which cryptocurrency you invest in. See the chart in the image at the top of this post for the rates on each cryptocurrency, but let me highlight that you can earn 8.6% on GUSD (a “stablecoin”, more on this in a minute) and 6% on Bitcoin (up to 2.5 BTC, then 3% after that). That interest is paid monthly and you have full liquidity (you can buy, sell, or withdraw at any time, with a turnaround of one business day or less). How in the world can they pay that high of interest, when even the best savings accounts are paying 0.5%? It’s because they are able to charge around 10% to lend dollars to institutions, and around 7% to lend crypto to them.

So what’s the catch? There are (at least) two major ones. This is not a bank (they are regulated similar to companies like Square and SoFi), so your money is not FDIC insured. You can lose money – perhaps most or all of it. And (most) cryptocurrencies (like Bitcoin and Ethereum) are very volatile, so this is not for the faint of heart. But this is where GUSD, a “stablecoin”, comes in. Briefly, stablecoins are designed to be, well, relatively stable, with the value staying very close to $1. The best ones (like GUSD) are regulated and have the same number of US Dollars in an audited bank account as they have issued GUSD tokens. There is no guarantee that they will remain close to $1, but with the backing of actual dollars in an actual bank, the volatility should be relatively low (certainly compared to something like Bitcoin).

All of the above is a very brief, simplified explanation, so please listen to those podcasts to learn more (and perhaps do further research). And another reminder that this is not like a bank account – it is much riskier.

So now the main point of this post. After listening to these podcasts and exploring around a bit, I decided to invest a small amount (currently $2,000) in BlockFi, moving it from my savings account (in four batches over the last couple of months as I became more comfortable). While I may decide to invest more over time, at this point I didn’t want to invest any more than what I would be okay with if it should happen to go to $0. While I obviously wouldn’t be happy with losing $2,000, it wouldn’t be life changing, so I’m okay with the risk (and I don’t think it will go to $0). 

All $2,000 is invested in GUSD, so I feel like it is relatively “safe”, and unlikely to vary much from $2,000. BlockFi has a “flex interest” option where you can choose to have your interest invested in the same currency you earned it with, or in another currency. My current setting is that when I receive interest (8.6% annual rate on GUSD) at the end of each month, I have it invested in Bitcoin. (I am currently the proud owner of 0.00021612 BTC :-). I have earned a little over $7 in interest so far, and have accrued $6.81 so far this month that will be paid at the end of the month (recall that I did not invest the full $2,000 initially). The amount I have in Bitcoin earns 6% interest (which also gets reinvested in BTC), but of course the value of Bitcoin is anything but stable. My rationale (rationalization?) is that BTC could lose 90% of its value and I still would be ahead compared to earning 0.5% on my savings account (assuming GUSD stays stable). At this point I am not using BlockFi to actively purchase BTC (other than with interest), but they do appear to be a good platform to do that, as they do not charge any fees, which apparently other crypto platforms do (there is still some spread of 0.5 to 1% when you purchase, but that appears to be less than other platforms, plus no fees). They are also about to launch a rewards credit card, where you’ll get 1.5% back on purchases, but paid in BTC :-).

Since I started this, BTC has skyrocketed by about 70%, so I’m considering switching the flex interest option back to GUSD. While I generally don’t believe in “market timing”, Bitcoin is a bit different and compounding at 8.6% in GUSD seems like a pretty decent alternative (given the assumption that GUSD will be relatively stable). If BTC then drops a lot (which it will), perhaps I will switch back. (I’m not selling my current 0.00021612 of BTC.)

So, with a reminder of the caveat that this is much riskier and more volatile than a bank account and that you can lose money, what are your thoughts on this? For those of you looking for an alternative to very low interest bank accounts, would you consider putting some of your cash into BlockFi? If you do decide to invest, you might consider using my referral code. Please don’t feel compelled to, especially if you think this was all just an attempt to get you to use my referral code – it wasn’t (I promise). I just wanted to share in case anyone is interested, but if you do use the code and deposit at least $100, both you and I will get $10 in BTC as a bonus (you have to leave the balance in there until at least the first interest payment to earn the bonus). But you can also just choose to sign up without using the referral code if you have any concerns. I hope if nothing else this has helped educate you a bit (like it has me) about some of what is happening in the fintech space.

Edit: I forgot one important point for residents of New York State: New York residents can’t participate yet other than to get a loan and rewards card (interest products are not allowed yet in New York per regulations.)

Update 2-24-21: New features of the BlockFi Bitcoin Rewards Credit Card were just announced.