PERA: It’s Even Better Than You Think

pera

Most Colorado (public school) educators know that Colorado PERA is a “good” retirement program, especially compared to Social Security, but often they don’t know just how good it is. Fully exploring this topic is beyond the scope of this blog post, but let me briefly hit some of the highlights.

As part of SB 14-214, the the state of Colorado commissioned three independent studies of Colorado PERA, two of which are particularly relevant to this discussion. The Milliman Retirement Benefits Study, released in January of 2015, looked at how Colorado PERA’s benefits fit into the larger picture of total compensation, and was designed to evaluate the value of PERA compared to other retirement packages offered by other states and by private companies. The executive summary states,

The state’s total retirement compensation package is equivalent to 15.7% of pay (15.4% defined benefit and 0.3% retiree health), relative to the market median of 14.7% (combined sources: defined contribution, defined benefit, social security, and retiree health)

Basically, this says that as part of a total compensation package, Colorado PERA is just above the median benefit paid by states and private companies.

The second study, the Gabriel, Roeder, Smith & Company Plan Design Study is a bit more in-depth and relevant to this discussion. The purpose of this study was to compare Colorado PERA’s plan design and, specifically, the costs and effectiveness of PERA, as compared to other retirement plans offered in the public and private sectors (including the one that affects the most people, Social Security). Again, from the executive summary,

This study found that the current PERA Hybrid Plan is more efficient and uses dollars more effectively than the other types of plans in use today.

When the study was presented to the State of Colorado’s Legislative Audit Committee, GRS officials told members,

Colorado’s largest public employee pension system is the most efficient and effective a state could have.

Those are important pieces of background to know, especially when the legislature is in session and various bills are offered regarding PERA. But I want to point out some specific features of Colorado PERA that are particularly relevant to you from an investment and financial planning perspective.

Colorado PERA represents over 500,000 members which provides some significant advantages to you in terms of economies of scale and in terms of investment returns. Because PERA is so large, it is able to both invest at low cost and to invest in areas that are not available to you as an individual investor. Because they are a large, institutional investor, they are able to negotiate investment fees that are lower than what you can typically achieve on your own. They can also invest in areas such as real estate and private equity that are not available to you as an individual investor. Both of these help PERA achieve higher returns (at the same level of risk) than most individual investors.

Perhaps even more importantly, however, is the fact that PERA is the ultimate long-term investor. As an individual, you have a “life-cycle” to your investments. Typically as you get older and then eventually when you are retired, conventional wisdom indicates that you should get more conservative with your investments because you don’t have time to “recover” from a market downturn. But because PERA pools money from over 500,000 members, and because they are essentially investing in perpetuity, in many ways PERA can invest like each one of those investors is an unchanging 35-year old.

While PERA does have to deal with cash flow issues in order to pay benefits, and they certainly have to manage risk and particularly be concerned with sequence-of-returns risk, overall they can truly invest for the long term. Which means that even as you get older, PERA doesn’t have to adjust its investments based on your age, they continue to invest as if you were 35. This allows them to stay fully invested for the long-term at an appropriate level of risk that will generate good long-term returns.

In addition, once you do retire and start drawing your PERA benefits, those benefits are guaranteed for life, including a 2% annual increase to help cover inflation. (Note: that 2% applies to those hired before 2007, and can temporarily decrease following calendar years that PERA investments lose money, which does happen, but not that frequently. For those hired after 2007, it could also be 2%, but it’s a bit more complicated.) Let’s use a specific example to put that into perspective.

The median PERA retiree earns about $35,000 per year in benefits. There’s a rule-of-thumb in financial planning circles called the 4% rule which says that, based on historical results, people can typically withdraw 4% of their investment balance each year to live on and still expect their money to last until they die. While not perfect, the 4% rule is pretty robust, which means that the $35,000 per year in our example equates to about $875,000 in savings. Many career educators will likely qualify for a much higher benefit, maybe $55,000 a year or more, which equates to $1.375 million in savings.

Now, this is a very rough equivalency, as an investment balance using the 4% withdrawal rule has a decent chance of actually growing over time, which means you could leave a healthy inheritance, while your pension income ends when you die (or when your beneficiary dies if you take Option 2 or 3). But I think it still gives you a rough idea of the incredible value of your PERA pension. It really does allow teachers to become millionaires by the time they retire (and multi-millionaires if you invest your own savings wisely).

There’s one other important aspect of this that I think many Colorado educators may not notice. Because this pension income is guaranteed, in many ways you can think of your PERA pension as the fixed income (bonds) portion of your portfolio. This means you can invest your other retirement savings (401k/403b/457 – I’ll write a post soon on retirement savings plans) more aggressively than folks who don’t have a pension plan like PERA, which can ultimately generate a lot of increased wealth and therefore financial security. (I will write a post soon on investment “risk” and how “aggressive” investments are not necessarily more risky for the long-term investor.)

This is one of the main reasons why I think it’s unfortunate that many Colorado educators don’t really start thinking about PERA until they are close to retirement. In reality, the fact that you have PERA as your retirement plan should affect your financial planning from the first day you begin PERA-covered employment. (This is also one of the reasons I decided to start Fisch Financial – after talking with colleagues over the years about PERA, I realized how little many of them have thought about how PERA should affect their financial planning.)

So, how good is PERA? It’s great in-and-of-itself, but it also allows you to be more successful with the rest of your investments as well. Please consider incorporating the affordances that your PERA benefit allows you in the rest of your financial planning.

Who Should Use Fisch Financial?

who

Let me be clear, many of you should not. Many of you should hire a full-blown certified financial planner (CFP) who uses a fee-only method (as opposed to percentage of assets managed). This is especially true if you have a more complicated situation such as owning multiple real estate properties, or being part of a trust, or having a complicated legal situation (among others).

So if the above is true (and it is), why am I offering this service at all? Well, three main reasons.

    1. The majority of Colorado educators (my “target audience” if you will) do not have complicated situations. They have one or two incomes, have a mortgage on a house, have normal bills and maybe have some investments, but they aren’t very knowledgeable (or at least not confident in their knowledge) of how to handle their finances (and often just aren’t very interested in the topic). While they would also benefit from seeing a “real” financial planner, there are a lot of relatively straightforward changes they should probably make that I can help them think through. Which leads to reason #2…
      .
    2. A lot of you won’t hire a certified financial planner (at least not yet). A lot of folks are intimidated by financial stuff, and they are worried that someone will lose them money or, worse, actually take advantage of them for financial gain. These folks are typically not that confident in their own knowledge and are worried they won’t be able to work intelligently with a financial planner and therefore will “waste” the money they pay the financial planner for no real gain. While I think any good financial planner can add a lot of value, it doesn’t matter if you won’t hire them. By offering a free service, I hope to not only help you make some positive changes in your finances, but perhaps also get you to the place where your confident enough to work with a certified financial planner should you choose to.
      .
    3. I want to help. That maybe sound cheesy, or cliche, but it’s true. I’ve been interested in financial topics since high school when I worked in a credit union, and have continued to read a lot and learn over the years. I’ve certainly made many mistakes (and undoubtedly am still making some now, although hopefully not too many), but I feel like I’ve learned a ton over the years and am in a position to help others avoid any mistakes they might make (or possibly correct mistakes they’ve already made). For a lot of people, there are somewhere between 3 and 10 relatively simple things they can do that can make a huge difference in their financial security (and, therefore, in achieving their goals in life). I can help you figure out those things.

In addition to the general financial/investment knowledge I bring to the table, I’m very knowledgeable about one aspect that is key for Colorado educators: PERA. While most Colorado educators have a vague idea that PERA is a good thing, they don’t realize how good, and they also don’t realize that having PERA should affect all of their other financial decisions, and not just when they are close to retirement, but from day one that they start in PERA-covered employment.

This (along with lack of understanding of benefits and specifically 401k/403b/457 plans) is one of the main reasons I decided to offer my services. Over the years I’ve had so many conversations with very bright educators who nevertheless have very little knowledge of these areas and consequently have made decisions that have not been optimal. This may or may not be you. For some of you, working with me will end up making very little difference because you are knowledgeable and have made good decisions along the way. But it won’t cost you anything (other than a little bit of time) and it should reassure you that you’re on the right path. For others, this truly could be life changing. And I don’t say that lightly, being financially secure really can change your life and allow you to focus on what really matters – financial success isn’t the goal, it’s the means to achieve whatever your goals are.

Photo credit: Mark Dumont via Foter.com / CC BY-NC