Turn IPERS Into a Comfortable Retirement

This post was updated April 2020.

Hello everyone. We are excited to revisit one of our most popular topics: IPERS, or the Iowa Public Employees’ Retirement System. All of the information in this post is revised to reflect the current state of the system as it stands in 2020. 

If you’re a public employee in the state of Iowa, you have an excellent pension system available to you that can act as the foundation of your retirement plan. Pensions are all but a thing of the past, but IPERS is an excellent way to take advantage of this incredible retirement savings vehicle. 

Combine your state pension, Social Security, and other retirement investments like 401(k), IRA, and additional investments, and you will find yourself in a great financial spot come time for retirement. Today, our team will demonstrate how IPERS works, a basic benefit calculation, as well as two costly mistakes you’ll want to avoid.

Bonus: We recently hosted a webinar on IPERS, where we covered in more detail how to create a retirement plan around IPERS, and how IPERS works with your other retirement assets. Click here to watch a recording of the webinar.

The Fundamentals of IPERS

The Iowa Public Employees’ Retirement System (IPERS) is available to permanent employees of public entities, like the state government and cities, Regent universities, community colleges, school districts, and sheriff’s departments. 

Participation in the program is mandatory as long as you are working in a job covered by IPERS. Contribution limits are generous and are up for review every July. Most members contribute the maximum amount possible which for 2020 is 6.29% of their salary, while their employer kicks in 9.44%, for a maximum total annual contribution of 15.73%. 

This rate is in place from July 1, 2019, through June 30, 2020, at which point the rate can be adjusted by no more than 1% up or down. Either way, that’s a pretty hefty savings rate, and if you can swing a 20-year career with that level of contribution, you’ll have a significant pension available to you. 

Contributions are income tax-deferred aside from FICA and Medicare taxes which is 7.65% in 2020. This just means that you’ll pay Federal and Iowa income taxes once the pension starts in retirement. The maximum wage that counts towards the contribution percentage is $285,000 for 2020.

IPERS does have a vesting formula that was updated in July of 2012. This update stipulated that an employee had to accrue at least 7 years of service or who are at least age 65 working for a covered employer.  

Vested members have access to an array of benefits such as disability benefits, death benefits, and many retirement benefits such as portability, access to employer contributions, and retirement benefits as early as 55 (at a reduced rate). Check out the IPERS website for more details on vested member benefits.

A Rough Calculation of Your Retirement Benefit

When you start to plan for retirement, you can do a quick calculation of your retirement benefit.  To get the real value down to the dollar, you’ll have to contact IPERS directly.  But suppose you want to know the ballpark amount, here’s how you do it:

  1. Take your highest five years of salary over your career and average them, like this—
    • Year 1 = $50,000
    • Year 2 = $55,000
    • Year 3 = $60,000
    • Year 4 = $65,000
    • Year 5 = $70,000
    • Average = $60,000
  1. Multiply this by the Multiplier (catchy, eh?). Suppose you have 20 years of service, you’d use 40% in the chart below.
  2. Factor in any early-retirement reduction. In our example, at 20 years, there would be no reduction.  See the Member handbook for how to know if you’re “early”.
  3. Your annual benefit would be $60,000 x 40%, or $24,000

The calculation IPERS uses is a little more detailed, but this will get you close.

Note that your IPERS pension doesn’t have an annual “cost-of-living-adjustment” (aka COLA).  That means your benefit will never go up during retirement, so the effect of inflation will erode your real benefit over time (what it buys when you’re 80 will be less than when you’re 60). This is unfortunate, but a common feature of most pensions.

Building Up Your Comfortable Retirement

Now that you have your estimated IPERS benefit, let’s talk about the rest of your retirement income. In our example above, our soon-to-be-retiree has replaced about 40% of her annual income. She will also receive a Social Security benefit, and though that system has its own complicated calculation, you can generally assume Social Security will also pay about 40% of your annual salary.

There are some important caveats here, like the length of employment, and how higher-income workers replace a smaller percentage. Also, one of the most important things to remember is that your situation is unique, have we mentioned that before? You’re reading this because you want general guidance, but if you want specific answers, schedule a free consultation to create a more detailed, custom plan.

Caveats aside, your IPERS and Social Security benefits could replace a significant amount of your annual income, around 80% in our example retiree’s case.  This is the bedrock of your retirement plan—learn to love these two foundational pieces!

This foundation might not make for a “comfortable” retirement though, with fun extras like hobbies and vacations. For that, you’ll need additional savings. The last rule-of-thumb we’ll discuss today as we build the basic plan for your IPERS-based income is the 4% rule. 

From your investments and savings, you can safely withdraw 4% per year during your retirement. If you have $100,000 in investments, that means you can safely take out $4,000 per year without hurting your long-term spending goals. Again, this is general advice, and not always useful for specific planning needs. Creating a custom, tailored plan designed to optimize your unique needs is a crucial part of this process.

But if you’re writing this estimate out on a napkin, you’re going to get pretty close:

IPERS + Social Security + 4% of investments = my (comfortable) retirement income

Costly Mistake #1 to Avoid

One of the decisions you make with IPERS is the type of annuity, which is just a fancy way of saying the pension features you get with your monthly benefit. There are a number of options, and one of the popular choices is a Joint & Survivor (J&S) Annuity, which pays a benefit while you’re alive, and a separate benefit to your survivor, usually your spouse, when you pass away.

Joint & Survivor annuities are fantastic ways to ensure a married couple can comfortably retire, but you need to pick the right percentage option (there are 100%, 75%, 50%, and 25% choices). Each percentage is reflective of how much your survivor gets: if you pick 100%, they get the same amount as while you were alive, and if you pick 25%, they get that amount percentage of your monthly check.

Each choice comes with different monthly payments. In general, the lower the percentage that you choose, the higher your monthly payment will be. But a higher monthly payment at a lower percentage could cause some major cash flow issues for your dependent. Let’s take a look at an example.

John elects a 100% joint and survivor pension option which gives him $2,000 per month. With the 100% option, his wife Elane is eligible for the full $2,000 check to continue after John passes. If John were to select the 25% option, we can estimate that his monthly payments would increase to $2,400 per month. But when he passes, Elane will only be eligible for 25% of that check, or $600, decreasing her lifetime benefit significantly. 

Remember that your IPERS pension is a foundational piece of your retirement income, for both you and your spouse. When one spouse passes away, household expenses don’t decrease by 50%. In reality, they usually only go down by 20-30%. Be sure to keep this in mind when choosing a pension election.  

When you select your pension options, be sure to factor in your additional income streams, spouse/dependent needs, and lifestyle goals to help you come up with the right balance.

Costly Mistake #2 to Avoid

Many Iowa public employers offer another retirement benefit called the Retirement Investors Club or RIC. This is meant as an optional savings plan to supplement IPERS which can significantly increase your savings. That’s good, let’s use it!

When you invest in RIC, you will be able to pick from a menu of stock and bond funds. Check it out, if you’re wondering what’s available.

But a word of warning—some of the fund choices aren’t productive! We have seen some expensive funds that are not designed to give you the most value as an investor. In place of those expensive funds that won’t advance your portfolio, there are less expensive, yet equally viable alternatives that do a better job. When you find assets with lower expense ratios, they give more of the fund returns back to you as the investor.

How do you know which funds will work best for you and which won’t? It’s not easy, but we do have a tip for how to avoid this costly mistake: invest in a target-date retirement fund. RIC offers two sets of target-date funds through Vanguard and Blackrock—both of which are sound options. But watch out for the other fund offering through American Funds. We have found it to be expensive and not efficient for your portfolio.

This is just one example of the specific details our team gets into with you while creating your retirement income strategy

Embrace IPERS – It’s a great part of your retirement plan!

IPERS is a tremendous system designed to ensure you can retire comfortably. It is an important piece of your retirement income planning along with Social Security and other savings vehicles. 

Once you know the basics of how to use IPERS in your retirement income plan, and a couple costly mistakes to avoid, you’ll be well on your way to the retirement plan of your dreams!

If you’d like to discuss your specific retirement scenario in more detail, let’s talk!

Additional information about IPERS:

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