Early Retirement on CalPERS

IRA-accountWhy is it much easier to retire early on a pension like CalPERS? Can’t you do the same thing by investing in the stock market with a IRA account, 401k account, or 457 account?


Early retirement is a lot easier with CalPERS. For one thing, many CalPERS pensions come with a COLA (Cost of living allowance) that ranges from 2% to 5%. If you’re investing in a self directed IRA account, 401k account, or 457 account, you’re never entitled to a COLA. You have to earn your COLA through returns in the stock market.

Why is Early Retirement Harder With an IRA Account, 401k Account, or 457 Account?

As you probably know, the stock market does not always go up. It has been sideways from 1999-2009, which means you’re losing money in the stock market when inflation is factored in. Whereas if you’re invested with CalPERS, you’re guaranteed a 2%, 3%, 4%, or 5% COLA along with 6% interest on the employee balance if you choose to withdraw from PERS (don’t do that).

Cost of Early Retirement

If you took your portion of the  money in your CalPERS pension. rolled it over to an IRA, and tried to buy the same or better retirement, you’ll find that it’s nearly impossible to accomplish. Back during the dotcom days, a 12% stock market annual return was low. People thought they could make 20% or 30% hand over first, year after year. As we’ve found out in 2009, Bernie Madoff promised 12% but it was impossible to deliver consistently over the long term.

When Investing in Your 457 Account, IRA Account, or Roth IRA Account Makes Sense

If your CalPERS gives you too little income to support yourself and your family, you will need to put money into your 457 account, IRA account, or Roth IRA account. Here, we will describe the advantages of each account type.

With a 457 account, the entire money can be accessed without an early withdraw penalty once you’ve separated from your public government employer.  The money is tax deferred until withdrawal as well. This means if you retire early at age 50, you have access to your account without any early withdrawal penalties.

With a Roth IRA, the tax is paid upfront in your paycheck. This is good if your tax bracket is low. Then all of your investment earnings are tax free. Also, the initial contribution to the Roth IRA can always be withdrawn without penalty. However, any amounts greater than the original contribution would incur an early withdrawal penalty. Also, you get the widest amount of investment options not available from your employer’s retirement account. Do you want to invest in gold? No problem. But that would be a problem in most 457 accounts.

With an IRA account, you have a unlimited array of investment options just like with an IRA account. The money is tax deferred just like a 457 account. However, the tradeoff you’re making is a potentially early withdrawal age without penalty versus investment options. Also, you’re limited to only $5,000 or $6,000 annual IRA contribution, depending on age. However, an IRA may make sense if you invest less than $6,000 per year and want an investment not offered by the 457 account.

Annuity for Lifetime Income?

So how about buying an annuity to get a lifetime income? Well, make sure you include the COLA you just gave up by withdrawing from CalPERS. If you price out annuities, you’ll find that your balance is nowhere near enough money to fund the cost of an annuity.

When an Annuity Makes Sense

However, there is a circumstance when an annuity makes sense. If your CalPERS pension will only give you a low monthly income, then you can use the money in your IRA, 401k, or 457 accounts and buy an annuity to make up the difference.

Just because you have a CalPERS pension, it does not mean you should not invest in an IRA, 401k, or 457. In fact, if you want to have enough money to last from an early retirement, you’ll need to beef up your savings as much as possible. This is especially critical if your CalPERS pension cannot pay for all of your monthly expenses after early retirement. Consider the fact that pension retirement formulas penalize you for retiring early. For example, the 2.5% at 55 drops down to 2% per year of service if you retire at age 50. If you have 20 years of service, that’s a 10% drop in monthly retirement income by not waiting until age 55.