One of the biggest wake-up calls I've ever experienced when I took and interest in FI and attempting to figure out where I stood was peeling apart the police pension system. What I found was akin to having a large, freezing cold bucket dumped on my head. When I started this job in 2009 I never would have imagined states differed so much. My ASSUMPTION (never assume) was they all generally worked the same. I was so wrong...
The factors I have learned about with pensions which vary between states are:
- Time required to work till normal pension, vesting and minimum age.
- Annual percentage accrual and contribution percentage.
- Cost of Living increase (COLA) per year in retirement.
The real benefit package of policing goes so much further than your base pay. Whatever dollar amount you make + extras (you know what I am talking about (OT, language pay, degree pay, certificate incentive, SWAT, Negotiator, K9, Motorcycle, etc)). Once we understand what is counted towards your pension the math can be pretty basic to figure out. Lets dive in.
What are the factors in your Final Retirement Compensation?
The National Conference of State Legislatures (ncls.org) has very useful table we can use to dive into to help us understand our states system (and lother agencies).
For this example lets look at my state, Montana (Big Sky Country).
(Last 3 years average) ($79k+$80k+$81k)/3 = $80k
(Years of service * 2.5%) 20 years * 2.5% = 50%
(Final Compensation) $80k * 50% = $40,000
Age and Service Requirements for Normal Retirement:
This column states the rules in which you are able to collect on you pension. Montana is one of the last great states with have a simple rule. Do 20 years and at any age after collect, regardless of age. Easy right? So if you start at 24 you are eligible to retire at 44 with 50%.
Lets compare apples to avocados by looking at another state.
South Carolina Police Officer Retirement (A bit more complicated).
Above is South Carolina's retirement schedule. Here is the primary difference. Years of service and age requirement.
Unlike Montana, South Carolina requires you to stay in the job for 27 years AND be 53 years old AND requires 5 years of "earned service credit" prior to retirement to collect a "normal" pension OR be age 55 with at least 8 years of "earned service credit" (Vesting 8 years).
Earned service credit is another term for actually working those years. (In many states you can purchase and transfer years.)
Here is how the numbers differ in a nutshell.
Montana @ 44 YOA w/ 20 years @ 2.5% salary each year.
South Carolina @ 55 YOA w/ 27 years @ 2.14% salary each year
There are a number of ways to approach the math for this, but the biggest take away in this are the years working. So why do they differ? Short answer: the state legislation.
Here is a brief summary.
Assuming the compensation (salary/benefits) between the states is the same (for the sake of math) our numbers shake out as follows:
- Montana requires 20 years for 50%
- South Carolina requires 23.36 for 50%
Again, South Carolina has an age restriction of 55 before collecting. Assuming all things equal (salary) the person in Montana could collect at 44 while the employee in South Carolina must wait till 55.
In a nutshell...
- The Montana Employee will collect $508,311.83 (Annual Pension + COLA @ 3% * 11 years).
- The South Carolina Employee will collect $0 until they are "aged."
- The Montana employee's retirement wage @ 55 will be $53,756 (3% COLA per year over 11 years).
- The South Carolina employee's retirement wage @ 55 will be $40,000
Note: South Carolina deducts social security. This is another topic because those with government pensions are "penalized" when drawing they draw social security. More on that later...