Retirement planning can often seem like a complex puzzle, but there’s a strategy that could significantly enhance your retirement income. It’s known as the ‘Last 60-Month Rule’, a part of the Government Pension Offset (GPO) provision.
The GPO can reduce Social Security benefits for individuals who receive a pension from a federal, state, or local government job where they did not pay Social Security taxes. This often impacts teachers and other public employees in Texas. For many individuals who’ve worked in government roles where they didn’t pay into Social Security, the Government Pension Offset (GPO) can come as a surprise. This rule can significantly affect the Social Security spousal benefits they might expect to receive.
Let’s break down an example to understand this better:
Imagine a teacher who receives a pension of $2,500 per month from their government job. Their spouse, on the other hand, has worked in a job where they paid into Social Security and is entitled to a benefit of $2,500 per month. Typically, the teacher would be eligible for a spousal benefit, which is up to half of their spouse’s benefit, amounting to $1,250.
However, the GPO comes into play here. It reduces the spousal benefit by two-thirds of the teacher’s pension. In this case, that’s $1,667. Since this amount is greater than the original spousal benefit, the teacher’s spousal benefit is reduced to $0.
Many teachers remember the “last day rule,” which allowed individuals to avoid the GPO if their final day of employment before retirement was in a job where they paid Social Security taxes. The Social Security Protection Act of 2004 closed this loophole. Now, to avoid the GPO, individuals must work in a job where they pay Social Security taxes for their final 60 months of employment. This rule allows you to receive full Social Security spousal or survivor benefits if your last 60 months of employment is covered by Social Security and TRS.
Let’s illustrate this with another example: a couple, Jane and John. Jane, a Texas teacher, has spent her career in a job not covered by Social Security. As she nears retirement, she learns about the ‘Last 60-Month Rule’ and completes her career at a district that participates in Social Security and TRS, thus eliminating the GPO.
At 65, John files for his Social Security benefit and Jane begins receiving a spousal benefit of around $1,250 per month. Over the next 20 years, this would amount to a total of approximately $300,000 that Jane would’ve otherwise been precluded from receiving.
At the same time, John’s benefit of $2,500 per month is increasing at a steady rate of 2% per year. By the time Jane turns 85, his benefit has risen to about $3,676 per month. After John’s death, she switches to John’s full benefit, receiving an extra $220,558 over five years.
By her 90th birthday, Jane has received around $520,558 in retirement income, thanks to the ‘Last 60-Month Rule’.
According to an unofficial list compiled by the Employee Retirement System of Texas and researched by TCTA, the following districts participate in Social Security for all employees: Anahuac ISD, Austin ISD, Big Sandy (Polk County) ISD, Brookeland ISD, Brownwood ISD, Fort Davis ISD, Goodrich ISD, Grady ISD, Harris County Department of Education, Iraan-Sheffield ISD, Lackland ISD, LaGloria ISD, Pharr-SanJuan-Alamo ISD, Port Arthur ISD, Premont ISD, Randolph Field ISD, San Antonio ISD, Sweeny ISD, and West Rusk County Consolidated ISD.
Remember, every individual’s circumstances are unique, and it’s always wise to consult with a financial advisor or Social Security expert when planning your own retirement journey. This rule is complex and must be followed to a T, but with the right knowledge, you too can maximize your retirement income.
Calculate the effect of the GPO on your spousal or survivor benefit: https://www.ssa.gov/benefits/retirement/planner/gpo-calc.html