The Iowa Public Employees’ Retirement System (IPERS) is a benefit plan provided to members that includes a monthly lifetime retirement benefit based on earnings and years of service in the system. If you live in Iowa, are entitled to IPERS, and are nearing retirement, you might have some questions about what options are available and which one is right for you and your family.
Key Features of IPERS
There are a few key features of your IPERS pension plan. If there is any one negative, it is that it does not include a built-in COLA, or Cost of Living Adjustment. The plan does provide occasional enhancements to the benefits based on market performance of underlying investments, but no increases are guaranteed.
Once you choose an option for payment, and receive that first payment, there are no built-in increases into the income payments to keep pace with inflation. Therefore, it is often important to maintain additional retirement investments that maintain the potential to keep or outpace inflation.
Another important thing to remember is the Beneficiary Designations inside the plan. You need to make sure and designate those who you wish to provide for if you were to die prematurely. This applies to both a residual benefit that someone would receive of your vested benefits while still working, and any type of survivor benefit you may choose to leave for someone after you retire. Make sure these are set up correctly.
So when can you retire under IPERS? Normal Retirement is acquired in three different ways.
- The Rule of 88: Anytime your years of service and Age added together equal 88 or more.
- Anytime you reach Age 65 regardless of years of service.
- If you are at least age 62 and have at least 20 years of IPERS employment.
If one of these 3 methods are not met when you start taking benefits, this will trigger a penalty as part of your benefit formula. This penalty is in addition to the reduction if you have less than 30 years’ service.
The earliest you can retire under IPERS is age 55.
Currently the penalty for retiring and taking benefits under “Early Retirement” or not fulfilling one of the requirements, is 6% per year, or .50% reduction for each month preceding normal retirement age.
If you leave IPERS employment early, it can be really tempting to turn the benefit on early cause people think they won’t go back, or they will just take the extra money. But there can be some long-term impacts, especially if you go back to IPERS employment. So, you really want to look at your options before taking early retirement because it is a decision that can’t be undone.
IPERS is a true pension plan, or defined benefit plan, in which the projected monthly benefit is based upon a formula involving the 3 primary factors listed above. Age, Salary, and years of service.
High 5 years of salary X Years of Service Multiplier – Penalty = Annual Benefit
The multiplier increases 2% a year for your first 30 years of IPERS-covered employment and 1% a year for years 31–35. The maximum is 65%.
There are six income options when thinking about how to take IPERS in retirement. There are 6 basic options, plus the ability to liquidate or rollover your balance into another qualified account.
Option 3: Maximum Retirement
Option number 3 is the option that will pay the largest single monthly benefit to the IPERS retiree for their lifetime. This is the straight annuity option. What this means is that if the IPERS retiree, the “Member” is living, it will pay them a monthly benefit. But with this option, when the member dies, the payments die also, and there is no residual left for anyone else.
This is the only option with no residual benefit of any kind to a beneficiary. Because, if you are not providing for anyone else, it will pay out the largest monthly benefit. All the other options are a reduction from this option.
Option No 2: Refund
With this option, the benefit is slightly reduced to provide a small guarantee. The member would be paid as long as they live, but if they were to die prematurely, their beneficiary would continue to receive the benefit until the total amount paid out equals the amount that the employee member had paid into the plan while they were working, plus interest. This would take 2-3 years in our example, depending upon your age, etc.
Option 1: Lump Sum Death Benefit
The 3rd Option we’ll talk about is Option 1. This option buys a Lump Sum death benefit to be provided to your heirs upon your passing, regardless of how long you live, very similar to traditional life insurance. This benefit is purchased in $1000 increments. Unlike traditional life insurance though, the lump sum payout to your heirs will be taxable as income to them as income.
Option 4: Joint and Survivor Benefit
Option 4 is what I would refer to as the joint and survivor benefit option. With this option you can provide a benefit for your spouse that will continue monthly for them if something happens to you. You can decide if you want them to receive the same benefit you are to receive, or a reduced benefit based on the percentages below.
- Joint – Full Benefit
- Joint – 75% Benefit
- Joint – 50% Benefit
- Joint – 25% Benefit
The catch is if your spouse passes away before you do, you are still locked at this reduced amount from that point forward.
Option 6: Pop-Up
So based upon the possibility of that situation happening in Option 4, Option 6 was created. This option allows you to still choose a Joint & Survivor benefit. However, if your spouse does predecease you, you are able to “Pop-Up” your benefit to a level that would be similar to the benefit you would receive from Option 2. This Option was added in 2001.
However, there is always a catch. The concern with this option is that now you have set a new low for income you receive. If you both live a long and healthy life, you have reduced the benefit you receive to lowest Option available for the entire period.
Option 5: 10 Year Guarantee
Option 5 provides a 10-year decreasing Benefit. This Option provides a lifetime annuity payment to the member, just as all the other options do, but also incorporates a 10-year Period certain Feature. This means that the member will be paid for their lifetime. But if they were to die before 10 years of payments had been made, their beneficiaries will receive the balance of payments for a total payout period of 10 years.
This is the only option that guarantees that the member and/or their beneficiaries, will receive all the contributions made to the plan by the member employee and their employer.
Don’t let IPERS be your only source of income in retirement. IPERS should only be one slice of your retirement planning pie. Coordinate your benefits with those of your personal and employers' other retirement plans, and those of your spouse. IPERS was not and is not designed to replace 100% of your income at retirement, nor is social security. It’s important to have a gameplan for your IPERS, but it is even more important on how to coordinate that with your other retirement savings, Medicare, and Social Security.
This is not a simple task. Consult with a trusted financial advisor about how to pick the best IPERS option for you and your family and how to ensure you can live comfortably in retirement. The way to make sure you will have a successful retirement is to try and coordinate all the pieces of your personal and financial lives.
Miller Financial Group does not work for, or are associated with, IPERS in anyway.