PSERS Retirement Options

A Retirement Guide for PA Teachers and Administrators

As a retirement planner who focuses on educator pensions, I’m always eager to share insights about the Pennsylvania Public School Employees' Retirement System (PSERS). I know it can seem a bit complicated, but understanding your pension benefits is super important for ensuring a secure and enjoyable retirement. So, let’s break it down in a way that makes sense and feels relatable!

What is Your PSERS Pension Benefit?

During your service years, you’ve been involuntarily contributing into a state system’s retirement fund. Then when you retire, the PSERS program provides you with guaranteed monthly income for life. It’s one of the strongest remaining pensions that we see with our diverse client base. 

The amount you’ll receive hinges on three factors:

• Years of Service: The total years you’ve been employed in the PA public education sector.
• Final Average Salary: Based on your last three years.
• Multiplier: A percentage figure set according to your member class.

How is Your Monthly Income Calculated?

Your monthly pension income is calculated using a straightforward formula:

Years of Service x Final Average Salary x Multiplier  = Annual Pension (Max Option)

Example: Let’s say you’re a teacher/administrator with 35 years of service and a final average salary of $100,000, under the Class T-D multiplier of 2.5%. Your calculation would look like this:

35 x $100,000 x 0.025 = $87,500/year, which breaks down to about $7,292/month.

Keep in mind that this reflects the maximum lifetime income option. We’ll dive into various options later that would adjust this amount if elected.

Is My Pension Income Taxed?

Yes, your pension is regarded as ordinary income, thus it is subject to federal income tax. However, it is exempt from FICA taxes and local earned income taxes. State taxes vary based on your residence during retirement. If you stay in Pennsylvania, you won't pay state taxes on your pension income.

Pension Options: What You Need to Know

When planning your retirement, it’s essential to familiarize yourself with your pension options. Here’s how to get started:

• Access Your PSERS Online Member Portal:
  • From there, create personalized estimates based on your potential retirement dates.
  • Page 2 will show tables of your pension options
• First Consideration
  • Find the amount of contributions and interest
    • This is how much you’ve contributed plus the earnings over the years. 
    • It’s significant because you have a one-time offer to remove these funds from the system.
  • Your Two Choices:
    • Leave It: This gives you a larger monthly payment for life.
    • Withdraw It: This gives you the freedom to use your money however you want—spend it, save it, invest it, you name it!
      • You can take out all of it or just part of it.
      • You can elect to roll it over to another retirement account, in which case you won’t have to pay taxes on it right away. 
• Next, Monthly Income Options:
  • You have the opportunity to leave benefits to others if you pass away. Those options are often used for protecting a spouse, but you can incorporate other individuals in your option as well.
    • You need to enter this person’s information in your online portal as you create estimates.
  • The more you protect someone else in the event you pass away, and the younger that person is, the less your monthly income will be.
    • It’s a calculated trade off figured out by very smart actuaries.

Note: Tables on mailed pension estimates look different than online generated estimates.

As you review your options tables on the online generated estimate, you will notice that each option (Max, 1, 2 and 3) is shown twice. One column is your benefit if you don’t withdrawal any of your contributions and interest (explained above). The other column is your benefit if you do withdrawal your contributions and interest.

When you don’t withdrawal your contributions and interest, that amount creates a death benefit - if you die early, that money will be left to your elected beneficiaries. But that amount decreases dollar for dollar as you receive income from the system. It will typically be eroded after a few years.

• • Maximum (Single Life): This offers the highest payment for your lifetime. It’s based solely on your life, and there is no residual income left for anyone when you die.
  • Option 1: This reduces your payment but creates something similar to life insurance if you die early. The pension system has a dollar amount for the value of your pension. Option 1 treats that amount as a death benefit - a lump sum paid to beneficiaries if you die. With every income payment you receive, that death benefit decreases equally. The longer you live, the smaller the payout if you die - until it’s eroded and there is no longer an applicable death benefit.
    • • The starting death benefit can be found on your estimate.
      • The time frame for the death benefit to be reduced to zero is typically around 15 years.
      • The reduced income remains for life, regardless of erosion of the death benefit.
  • Option 2: Provides a full survivor benefit for a designated person (such as a spouse or partner). It’s a further reduced income, but it will last as long as one of you are alive.
  • Option 3: Offers a partial survivor benefit of 50%. So if you die, your selected person, known as the survivor annuitant, will receive half of the initial income amount each month - for as long as they live.
  • The age of the survivor annuitant plays a significant role in the initial income amount.
  • You can also create a custom option and pick a different percentage left to a survivor. Those estimates need to be requested and the initial income amount will depend on the percentage left to a survivor, and their age.

Completing Your Retirement Application

Here’s a quick checklist to guide you through the application process:

• Submit within 90 days of your retirement date
• Rolling Over Contributions?: If yes, complete the Authorization of Direct Rollover form. This will transfer the lump sum to a retirement account, avoiding a taxable event.
• Know the difference in the following terminology on the application
  • A survivor annuitant receives income after your death if you select Options 2 or 3.
  • Beneficiaries are those who will receive the death benefit if you leave in your contributions and interest, or select Option 1.
• Exit Counseling: You have the option to attend or waive this step. However, attending is highly recommended unless you are working with a PSERS experienced professional.
• Confirm Receipt: After submission, double-check that PSERS has received your application.

Don’t hesitate to seek professional advice to ensure you make the best decisions. PSERS experienced advisors can help you complete and submit the retirement application with accuracy. Once you start receiving benefits, your choices cannot be changed.

Curveballs: things that affect your pension beyond these explanations

• Retiring early with penalty
• Option to buy back service years during non-PSERS eligible employment
• Divorce QDRO affecting pension benefits

These scenarios require further information and attention when assessing your options.

Next Steps

1. Log into the PSERS portal and review your estimates.
2. Make a plan to complete your retirement application on time.
3. Participate in an exit council session, or seek personalized guidance.

Wishing you a retirement filled with joy and purpose.
-Casey