Navigating retirement can feel a bit like being on a rollercoaster—you’re excited but a little nervous, and there are twists and turns you might not see coming. If you’re part of the Kansas Public Employees Retirement System (KPERS), it’s crucial to avoid some common pitfalls that can impact your financial security. Let’s dive into the seven mistakes you should steer clear of when claiming your KPERS benefits.
1. Claiming KPERS Benefits Too Early
One of the most significant mistakes people make is claiming KPERS benefits too early. Often, this decision stems from a lack of planning. You might find yourself ready to retire but realize your income is too low to sustain the lifestyle you want. Or maybe you’re simply not ready to retire yet.
The key here is to have a plan in place. Consider whether you might want an encore career or even some meaningful volunteer opportunities to fill your time. It’s essential to assess your financial situation before pulling the trigger on your KPERS benefits because once you claim them, there’s no going back.
2. Claiming KPERS Benefits Too Late
On the flip side, waiting too long to claim your KPERS benefits can be just as detrimental. Sure, you might be tempted to hold out for a bigger monthly benefit, but doing so could mean missing out on the healthiest and most fulfilling years of your retirement.
Again, having a solid plan is crucial. Knowing what you need financially to meet your retirement objectives will help you strike a balance. Consider part-time work, starting a small business, or consulting. These options can increase your income and give you more freedom. When you factor in the possibility of drawing your pension alongside this additional income, many KPERS enrollees find they could retire years earlier while still enjoying a satisfying retirement.
3. Ignoring Spousal Options
This is a big challenge that tends to sneak up on people. During your working years, your KPERS benefits are often communicated as a single-life option. In reality, there are 48 separate choices available when you elect your KPERS benefits. And this decision often comes at a time when everything else in your life is changing, which can add to the complexity.
Getting this decision right is critical, so understanding your options is paramount. It can be immensely helpful to work with a financial planner who understands KPERS. They can help forecast and plan for the various elements that retirement will throw your way. Consider your spouse’s age, life insurance, life expectancy, and retirement goals; all these factors can impact what will be the best decision for you. Don’t rush this decision—do your homework and put a solid plan together so you can retire with confidence.
4. Misunderstanding Cost of Living Adjustments (COLA)
Many people mistakenly believe that KPERS includes a Cost of Living Adjustment (COLA) similar to Social Security. That’s simply not the case. The amount you receive from KPERS in your first year is what you’ll continue to receive in your last year.
Now, think about the impact of inflation over a 30+ year retirement. The purchasing power of your KPERS benefit will erode over time. Therefore, it’s crucial to have a plan in place that allows for other income sources to increase over time, primarily through investments or income-producing assets like rental properties.
5. Overlooking Tax Implications
Understanding the tax implications of your KPERS benefits can be a bit tricky, and it’s entirely reasonable to feel a little lost. The first thing to know is that KPERS benefits are taxable at the federal level. This means any amount you receive will be counted toward your federal income tax, which also impacts how your Social Security is taxed.
However, here’s the good news: KPERS benefits are NOT taxable for state income tax in Kansas. For many, this equates to a savings of around 5.7%. When you factor in that KPERS is also not subject to FICA or payroll taxes—another 7.65% in savings—you’re looking at over 13% in tax savings compared to “regular” income. To put this into perspective, that could mean an extra $260 of income saved on a $2,000 monthly benefit.
Understanding these tax implications can help you make smarter decisions about your retirement income.
6. Failing to Account for Other Retirement Income
Another common mistake is not considering other sources of retirement income. While KPERS provides a solid foundation, it is almost certainly not your only source of retirement funding. This is where planning comes into play.
As we have already discussed, having an encore career or part-time job can significantly stretch your retirement benefits. Additionally, it would be silly to make your KPERS selection without also factoring in your Social Security and the potential income from your investment portfolio. Take the time to consider all these elements before making this crucial choice.
When approaching retirement, having a clear sense of your expected expenses and income is vital. The more detailed and thought out your plan, the more confidence you’ll have as you transition into retirement.
7. Not Understanding Your KPERS Tier
Finally, one of the biggest mistakes you can make is not understanding your KPERS tier. Your tier will impact both your benefit formula and your eligibility for retirement. Each tier has its own rules and benefits, and knowing where you fit in can help you approach retirement with greater clarity. Read about the different KPERS Tiers, in this how does KPERS work blog.
Understanding your tier means you’ll have a more solid plan, which is essential for a successful retirement. If you can easily pull data on the differences between the tiers, that can save you a lot of time and effort. Knowledge is power, especially when it comes to your financial future.
KPERS Claiming Confidence > Mistakes
Navigating your KPERS benefits doesn’t have to feel overwhelming. By avoiding these common mistakes—claiming too early or too late, overlooking spousal options, misunderstanding COLA, failing to account for other income, overlooking tax implications, and not understanding your tier—you can approach your retirement with confidence.
Working with a financial advisor who understands the nuances of KPERS can be beneficial. They can help you navigate the complexities of your retirement planning while ensuring that you’re making informed decisions every step of the way. With the right preparation and knowledge, you can enjoy a fulfilling and secure retirement.
This post is for education and entertainment purposes only. Nothing should be construed as investment, tax, or legal advice.