This blog post is about my story and PSRS. Every pension is different, and every situation is different. Consult with a financial professional before doing anything that impacts your pension, taxes, and/or retirement.
When I decided to leave teaching, one of my biggest financial decisions was whether to leave my pension in the PSRS system or take a refund of the cash-value. I would suggest not taking it in cash as you will owe taxes, but rather rolling that money into an IRA or other qualified account.
With a vested PSRS pension, the option to hold on for a guaranteed monthly benefit was tempting. However, after careful consideration of potential returns, flexibility, and tax strategy, I ultimately chose to take a refund of my pension, transferring it into an IRA to invest for the future.
Here’s how I came to this decision and what I learned along the way:
Understanding the PSRS Vesting and Refund Options
For teachers in Missouri, PSRS (Public School Retirement System) vests after five years of service. If you leave teaching before five years, taking a refund of your pension contributions is your likely your best option, as leaving it in the pension system without vesting yields no future benefit, unless you come back into the PSRS system in the future.
However, after five years, you’re vested, meaning you’re eligible to receive a guaranteed lifetime benefit at age 60.
At age 35, with around $82,000 in the cash value of my pension, I weighed the guaranteed income PSRS offered against the potential returns from investing on my own.
The Guaranteed PSRS Benefit vs. Investment Potential
Let’s start with the numbers. With eight years of teaching, my pension formula under PSRS would provide the following annual benefit calculation:
Years of Service: 8
Highest Three-Year Salary Average: ~$63,000
Pension Formula Factor: 2.5% (or 0.025)
Based on the formula, my annual pension would have come to $12,600 per year or around $1,050 per month starting at age 60. This amount could be slightly reduced if I wanted my spouse to receive benefits after my passing.
Note that the monthly pension doesn't change based on future market returns, inflation, or cost-of-living. It is a fixed amount based on the salary you made while working in education.
The pension route is certainly attractive, offering a stable, predictable income stream in retirement. But for me, a few factors tipped the scales toward rolling it into an IRA.
Anticipated Returns and the Power of Compounding
By rolling the cash value into an IRA, I could take that $82,000 and invest in a moderate-to-aggressive balanced stock portfolio. Assuming an 7% average return, I projected that this investment could grow significantly over time:
At 7% over 25 years (from age 35 to 60), the portfolio could reach over $445,000.
Income Potential: Based on the “4% rule,” I could potentially withdraw around $17,800 per year. More than the top end of the guaranteed pension.
This potential growth, combined with the added flexibility of owning the funds, was a strong draw. Investing this sum allowed me the freedom to make strategic moves over the years, including Roth conversions.
Roth Conversions: A Long-Term Tax Strategy
After taking a refund and rolling the funds into an IRA, I saw an opportunity to reduce my tax liability in retirement through Roth conversions. While building my career as a Financial Planner and our family operating within the 12% tax bracket, I gradually converted funds from the IRA to a Roth IRA. This approach helped me minimize taxes on the conversions while allowing my investments to grow tax-free in the Roth account, a strategy that will pay off when I begin taking distributions.
Four years in, I have converted the entire $82,000 from the IRA into the Roth IRA. This means that instead of having a $1,050 pension benefit that is taxable every month, I will now have a pot of money that will never be taxed again! This includes all future growth and dividends!
Flexibility and Family Considerations
Another significant factor in my decision was the flexibility of owning my retirement funds. With the PSRS pension, benefits are typically limited to a spouse and don’t pass down to children. By taking the refund, I gained the ability to leave any remaining funds to my children, creating a potential legacy.
Additionally, investing the funds gave me control over how and when I accessed the money, whether for emergencies, opportunities, or future life goals.
Potential Risks and Realities of Rolling Money Into an IRA
As with any investment decision, there are risks. Markets can underperform, and returns aren’t guaranteed. Here’s a quick comparison of how my choice to invest might play out in different scenarios:
Average Market Performance (7%): Discussed above. Portfolio size at age 60 could be $445,000 with the ability to take $17,800 per year using the 4% rule.
Market Overperformance (9%): Portfolio size at age 60 could be $700,000 with the ability to take $28,200 per year using the 4% rule.
Market Underperformance (5%): Portfolio size at age 60 could be $277,000 with the ability to take $11,100 per year using the 4% rule.
Determining the Break-Even Number
There comes a point where you will be better off leaving your pension in the pension system rather than rolling it into an IRA. The IRA has to have time to grow. What is the age where it makes sense?
In Missouri's PSRS, one would have to wait until age 60 to get the full retirement benefits within the pension. Other states differ, so it is important to know how your pension operates.
With a timeline of more than 20 years, I see significant advantages to taking the refund and investing the money in an IRA. With a timeline of less than 15 years I believe it makes much more sense to keep your money inside of the pension system. Those years between 15-20 can go either way, with the determining factor what the markets will return (which we can't possibly predict).
It also depends greatly on your personal goals, level of risk tolerance, and family situation!
Looking Forward: Was It the Right Choice?
Deciding to take the cash value of the pension was a big decision. Only time will tell if it was the best choice financially, but I feel confident in the factors I weighed. If you’re considering a similar move, it’s essential to think about your comfort with market risk, desire for flexibility, and personal goals for retirement.
The PSRS pension is one of the best pension plans in the country, IF you stay in the pension system. If you leave education, you will be stuck getting the same monthly benefit no matter what happens with market returns, inflation, etc.
By sharing my experience, I hope to provide insight for others facing similar choices. Retirement planning is deeply personal, and sometimes, stepping away from a traditional pension path can open doors to new opportunities and control over your financial future.
David Gourley, CSLP® is the Founder and lead Financial Planner at K-12 Planning, an independent financial planning firm specializing in finance for teachers. He served for eight years as a high school mathematics teacher before transitioning into the financial services industry. He started K-12 Planning in 2024 and his passion for serving as a fiduciary for teachers and a student loan planning expert runs deep, as his wife and several other family members have served as educators for years.
Comments