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  • Mort Reinhart

    Comparing Active and Retired “Real” Income;

    Is There Really A Difference In “Take-Home” Pay?


    But not sure if you can afford to retire and live on your pension (and Social Security). Worried about your health care? Concerned about the suspension of the cost-of-living benefit for retirees?

    If these are some of your issues, you are not alone.   Most folks who are thinking about retirement these days share these concerns.  

    However, a careful analysis of how YOU, personally, stand might alleviate some of your anxiety. This analysis requires you to look at a comparison of your present “take home” pay and compare it to “take home” pay you would be receiving in retirement. It requires you to understand the health benefits (and Medicare) that are available to you in retirement. And finally it requires a little out-of-the box thinking for the utilization of your tax-sheltered account in retirement.

    Let us start with the comparison of “take home” pay in the last year of your employment and the “take home” income you will receive when you retire. To do this you must know two percentages......60% and 80%.  

    The first number, 60%, represents the “take home” pay for an active educator, who sees a considerable amount of the contract salary (40%) disappear into thin air because, as a working person, the educator is paying a pension contribution, a health insurance contribution, a life insurance contribution, a combined Social Security and Medicare contribution, an unemployment contribution, federal income tax and New Jersey state income tax. Taken together, these items will equal 40% of the gross salary. (Many active educators are also voluntarily contributing to a tax-sheltered program (403b), which, when added to the required deductions, can decrease the “take home” amount to 55% of contract salary.)

    The second number, 80%, represents the “take home” pay of a retired educator who receives health benefits without cost and who pays only two of the major items an active educator pays - federal income tax and New Jersey state income tax. Federal income tax is paid on both the pension and Social Security amounts regardless of where the retiree resides. New Jersey state income tax, on the other hand, is (1) only paid on the pension amount and (2) only by a retiree who resides in New Jersey after retirement; a retiree residing outside New Jersey does not pay New Jersey state income tax on his/her retirement income.  Regardless of the residency, a retiree “takes home” 80% or more of their retirement income. (This holds true whether or not the retiree is collecting Social Security.)

    As an example, let’s take an active educator, age 62, with 32 years of credit in the pension system who is retiring on July 1, 2014.   The salary for that educator this year is $110,000, and the average of the highest three years is $106,000.   She makes a $6,000 contribution to a 403(b) this school year. The “take home” pay for this educator for the 2013-2014 school year is $60,000 after all her deductions.

    On July 1, 2014, she retires with a pension based on a formula of 32/55 times $106,000. That produces a yearly pension of $61,672.   Since she can also collect a Social Security amount of approximately $20,000, her gross retirement income will be $81,672.   She will have to pay approximately 20% of that in federal and state income taxes, an amount that comes to $16,334. That leaves her net (“take home’) retirement income of $65,337. 

    Notice that she “takes home” a greater amount after retirement (after 32 years of educational service) through the combination of pension and Social Security. If she chooses not to begin collecting her Social Security (or if she were younger than 62), her income would be $49,337, which would be 83% of the “take home” income she was receiving while working.   

    Notice, also, that she does not have to pay for her health benefits in retirement because she had more than 20 years of credit June 28, 2011, the date of the enactment of Chapter 78. Under Chapter 78, anyone who had 20 or more years of credit in the retirement system at the end of the 2010-2011 school year and who eventually retires with at least 25 years of credit will receive health benefits without cost in retirement.

    Any retiree who did NOT have 20 years of credit at the end of 2010-2011 will NOT receive FULLY paid health benefits after retirement, regardless of the number of years of credit in the retirement system. Such a retiree will be required to pay for health benefits, either partially or fully. If a retiree described above eventually completes 25 years of credit before retiring, she will pay a portion of the health insurance premium. That amount will be determined by two factors: the size of the pension being received and a chart showing the percentage of premium related to that pension amount. Under the current factors, the percentage of the premium payments paid by the retiree ranges from 3% to 35% of the full insurance premium. The larger the pension, the greater the premium paid by the retiree. 

    Someone retiring without 25 years of credit will pay the full premium for health insurance. Obviously, receipt of health benefits without cost has a significant impact on a retiree’s “take home” income, one that permits the favorable example above.