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PRTB and FERP Calculator

The purpose of the calculator is to guide the user toward a preliminary financial analysis of the choice between the Pre-Retirement Reduction in Time Base program (PRTB) and the Faculty Early Retirement Program (FERP). Using a limited amount of inputs provided by the user, the calculator computes the monthly or annual payments received under the two pre-retirement programs for different time horizons. Furthermore, the calculator provides the indicative dollar value of each option as of the starting date for the PRTB or FERP. All the amounts computed are gross of taxes (federal and state) and do not include any payments received from Social Security or any other sources of retirement income. Finally, the CalPERS benefits displayed by the calculator are based on the unmodified allowance payment option. The unmodified allowance is the highest amount payable to CalPERS members. Such payment option does not provide any payments to a beneficiary upon the death of a CalPERS member. Other benefit options are available and provide different level of payments for beneficiaries. Contact CalPERS for a detailed explanation of the different benefit payment options.

Input

Unit 3 faculty employee information
Service Credit when entering FERP or PRTB:

$
Financial Assumptions %
%

Choose an Output Type



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NPV Table

NPV Graph

Yearly Table


Definitions

Service Credit when entering FERP or PRTB
Service credit generally represents the amount of time worked for a CalPERS-covered employer. It is one of the three factors used in calculating your retirement pension. CalPERS retirement benefits are based on total years of service credit, age at retirement, and final compensation. For full-time employees, for each full time month worked, the service credit increase by 1/10 of a year. Hence, only 10 months of work are required within the fiscal year (July 1 - June 30) to earn one full year of service credit.
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Annual compensation when entering FERP or PRTB
Annual (final) compensation refers to the highest pay rate for a 1-year or 3-year period and is based on the full-time pay rate as reported by the employer. The employee may request that CalPERS uses a 12 or 36 consecutive month period other than the last 12 or 36 months to calculate the final compensation (depending on employer the contract).
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Discount rate
In order to compute the monetary value of the PRTB and FERP, one needs to consider the value of payment occurring a different dates in time by using a discount rate. A dollar today is worth more than a dollar in the future because inflation erodes the buying power of future money, while money available today can be invested and grow. For instance, assuming a discount rate of 5%, the current value (i.e., present value) of $1,000 in five years is $783.53. One would be indifferent between receiving $783.53 today or receiving $1,000 in five years. In fact, by investing $783.53 today at 5% one would accumulate $1,000 five years later. Basically, the further in the future a payment is received the lower its present value today. Hence, the discount rate is needed to compute the monetary value of a series of payments during an entire time horizon. The discount rate used in the PRTB and FERP computations should be related to the risk and time horizon of the series of payments considered. Given the structure of CalPERS, a reasonable assumption for the discount rate is the yield to maturity of California general obligation bonds. Hence, the discount rate should be related to the interest rate offered to investors by bonds issued by the State of California. At any point in time, though, there are many California bonds with different maturities. Which maturity should one consider? It all depends on the investment time horizon considered in the PRTB and FERP calculator. A reasonable choice would be to use a discount rate close to yields of bonds maturing in 15 to 20 years. Hence, given current market conditions, it would be appropriate to assume a discount rate in the range of 5-6%.
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Annual growth rate of payments
The annual growth rate assumes constant growth of PRTB, FERP, and CalPERS pension payments over the time horizon considered. The calculator makes the simplifying assumption that the growth rate of the work compensation during FERP or PRTB is equal to the growth rate of CalPERS retirement benefits due to cost-of-living-adjustment (COLA). Currently, state and school retirees are subject to a COLA maximum limit of 2% (compounded) annually. Hence, assuming an annual growth rate of payments of 2% is a reasonable assumption.
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NPV
The Net Present Value (NPV) is the monetary value of the different programs as of the starting date of the PRTB or FERP. The NPV uses the annual discount rate assumed by the user and calculates a lump-sum monetary value equivalent to the future payments under different time horizons. For instance, if the calculator shows that, under a given time horizon, the payments of the FERP have a NPV of $500,000 whereas the payments of the PRTB have a NPV of $400,000, then the FERP option is worth $100,000 more in "current dollars" than the PRTB option.
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Last Modified: Dec 6, 2012