Maximizing Your Arizona State Retirement Benefits
If you're an Arizona state employee nearing retirement age, you're in the critical window for maximizing your benefits package. The decisions you make now can add tens of thousands of dollars to your lifetime retirement income. Here are some key strategies to maximize your benefits in your final working years.
1. Time Your Retirement to Hit Service Milestones
Your Arizona State Retirement System (ASRS) pension is calculated using this formula: your average salary times your years of service times a percentage called a "multiplier." That multiplier increases at 20, 25, and 30 years of service. The rates for the multipliers are:
Under 20 years: 2.10%
20+ years: 2.15%
25+ years: 2.20%
30+ years: 2.30%
If you're approaching one of these milestones, working even a few extra months can significantly increase your lifetime pension.
For example, if you have a $5,000 monthly salary and retire at exactly 25 years instead of 24 years and 10 months, you get both the higher multiplier (2.20% instead of 2.15%) and one more year counted in the formula. That's an extra $62.50 per month or $750 per year. Over a 25-year retirement, that's nearly $19,000 in additional benefits from working just a few more months.
Staying on long enough to capture that increase could turn out to be one of the most profitable decisions you make.
2. Maximize Your Final Years' Salary
Your ASRS pension is based on your highest consecutive 36 or 60 months of earnings (36 months if hired before July 1, 2011; 60 months if hired after). This means your final working years have the biggest impact on your pension, far more than your early or mid-career earnings.
Every salary increase during this period directly boosts your pension calculation for the rest of your life. A 10% raise in your final years means a 10% higher pension forever.
Actively seek promotions, accept merit increases, and consider taking on additional responsibilities that increase your compensation during this critical window. A raise in salary, overtime (in most cases), shift differential, and certain bonuses all count toward your average monthly compensation. This can increase your pension for decades to come.
3. Use the 457(b) Special Pre-Retirement Catch-Up
Arizona state employees can contribute to a 457(b) retirement savings plan (similar to a 401(k)). The normal contribution limit is $23,500 per year in 2025. But in the three years before your normal retirement age, that limit doubles to $47,000 annually.
For example, if you're 62 and planning to retire at 65, you have three years to put away $141,000 in tax-deferred savings. For many state employees, this represents the single biggest opportunity to build retirement assets in their entire career.
Even if you can't reach the maximum, contributing as much as possible during these final years can significantly improve your retirement security.
4. Complete Any Service Purchases Before You Retire
ASRS allows you to buy back certain times that didn't count toward your pension. This includes:
Military service
Approved unpaid leave
Previous ASRS service you forfeited when you left and took a refund
Buying back this time can add years to your service credit, which increases your monthly pension in two ways: more years in the pension formula, and potentially pushing you into a higher multiplier bracket.
For example, if you have 23 years of credited service and buy back two years of military service, you jump from 23 to 25 years. That moves you from the 2.15% multiplier to the 2.20% multiplier, and the pension formula uses 25 years instead of 23. On a $5,000 monthly salary, that's an extra $275 per month for life.
If you are going to purchase service, it must be done before you retire. Once your retirement is processed, that option is permanently closed.
5. Work One Extra Month as a Buffer
When you retire, the ASRS will audit your account. If they find any small discrepancies in reported service, they will adjust your service time accordingly. A contribution reported in the wrong month or a payroll error from years ago could add up to being a few days or weeks short of your expected service total, which could impact your pension.
For example, if you retire after exactly 20 years to hit a multiplier threshold, discovering you're actually 19 years and 11 months would be devastating. Your multiplier would drop from 2.15% to 2.10% for life.
Working one additional month beyond your target retirement date creates a cushion that covers any adjustments.
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6. Max Out Health Savings Account Contributions
If you're enrolled in a high-deductible health plan, you can contribute to a health savings account (HSA). HSAs offer a triple tax advantage:
Contributions are tax-deductible
The money grows tax-free
Withdrawals for qualified medical expenses are tax-free
Unlike flexible spending accounts (FSAs), HSA funds roll over year after year. They don’t expire if unused. The 2025 contribution limits are:
Individual coverage: $4,300
Family coverage: $8,550
Age 55+ catch-up: Additional $1,000
If possible, max out contributions to your HSA but avoid spending the funds. Instead, pay current medical expenses out of pocket while the HSA grows. Over your final working years, this could give you tens of thousands of dollars for a tax-free medical fund in retirement.
7. Plan Your Health Insurance Coverage for Retirement
If you are retiring at age 65 or later, set up your Medicare benefits as soon as you can. The initial enrollment window opens three months before you turn 65 and ends three months after the month you turn 65. (A total of seven months.) Missing that window could cost you big time.
If you're planning to retire before 65, the gap between retirement and Medicare eligibility can be expensive. Your main options include:
ASRS retiree health insurance
COBRA continuation coverage (typically lasts 18 months)
ACA Marketplace plans
Coverage through a spouse's employer
The sooner you start planning your health insurance for retirement, the easier it will be to limit expenses. For example, maxing out your HSA could save you thousands in healthcare costs.
8. Understand the Return-to-Work Rules
If you're thinking about working part-time after retirement, plan for it now. ASRS has specific rules about working for an ASRS employer after you retire.
If you retire at normal retirement age and want a full-time position with an ASRS employer (20+ hours per week for 20+ weeks per year), you must wait 365 days. Violating this rule suspends your pension, and you'll have to repay any benefits you received.
If you take early retirement (before normal retirement age), you cannot accept a full-time position with an ASRS employer until you reach normal retirement age, regardless of how much time has passed.
If you're planning to work for a non-ASRS employer after retirement, none of these restrictions apply.
9. Choose Your Pension Payment Option
During your final working years, you’ll want to decide how you’re going to receive your ASRS pension. Your main options are:
Straight Life Annuity: This gives you the highest monthly payment while you're alive. However, nothing is guaranteed to beneficiaries after your death.
Joint & Survivor Annuity (50%, 66⅔%, or 100%): Your beneficiary receives the chosen percentage of your monthly payment after you die. For example, with a 100% Joint & Survivor option, your spouse gets your full pension amount for life after you die. You get less per month while alive than with Straight Life.
Term Certain (5, 10, or 15 years): If you die within the chosen timeframe, your beneficiary receives your payments for the remainder of that period. For example, if you choose a 10-year Term Certain and pass away after three years, your beneficiary gets payments for 7 more years.
Once made, this decision is irrevocable. It’s never too early to start planning for which option is best. The right choice will depend on your health and life expectancy, your spouse's age and health, other income sources available to your survivor, and whether you have adequate life insurance.
Start discussing this with your spouse and a fiduciary financial advisor well before retirement.
10. Review and Update Beneficiary Designations
Before you retire, review all beneficiary designations. These choices will override your will, so outdated designations could send your retirement assets to the wrong person. Fixing those mistakes can be costly and time-consuming. Check beneficiaries on every account, including:
Your ASRS pension (if you select certain annuity options)
457(b) deferred compensation
403(b) or 401(a) accounts if applicable
State-provided life insurance
Any supplemental life insurance policies
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11. Develop a Tax-Efficient Withdrawal Strategy
Your ASRS pension is fully taxable as ordinary income. When you add Social Security (up to 85% taxable) and traditional 457(b) withdrawals (fully taxable), you could end up in a higher tax bracket in retirement than you expected.
During your final working years, map out which accounts you'll tap first in retirement. Generally, you'll want to draw from taxable accounts first, then tax-deferred accounts like your 457(b), and save Roth accounts for last since they grow tax-free.
A fiduciary financial advisor can help you create a withdrawal sequence that minimizes your lifetime tax bill.
12. Consider Delaying Social Security
If you retire before 65, consider delaying Social Security while living on your ASRS pension and 457(b) withdrawals. Every year you delay Social Security past your full retirement age increases your benefit by 8% (up to age 70). This will provide better income later in retirement.
For example, if your full retirement age is 67 and your benefit would be $2,000 per month at that age, waiting until 70 increases it to $2,480 per month. That's an extra $5,760 per year for the rest of your life.
13. Plan for Roth Conversions in Early Retirement
Early retirement years provide an opportunity for Roth conversions. If your income is lower before you start Social Security, convert some traditional 457(b) funds to Roth while you're in a lower tax bracket. Because Roth funds are made with after-tax funds, you'll pay taxes now at today's lower rate, then enjoy tax-free growth and withdrawals later.
The key is timing these conversions strategically. Convert enough to fill up your current tax bracket without pushing into the next one. For example, if you're in the 12% bracket with room before hitting 22%, convert just enough to stay in 12%. This can save you significant taxes over your lifetime compared to taking those withdrawals later at higher rates.
14. Prepare for Required Minimum Distributions
At age 73, you must begin taking required minimum distributions (RMDs) from most pre-tax savings accounts. If the RMDs are large enough, they can push you into a higher tax bracket and reduce your lifetime income.
Some retirees begin strategic withdrawals from traditional accounts in their 60s to reduce future RMDs and avoid that tax spike. Planning this strategy before you retire gives you time to position your accounts properly.
15. Work With a Fiduciary Financial Advisor
The strategies above can add significant value to your retirement, but coordinating all the moving pieces can be complex. A fiduciary financial advisor can help you:
Make the right choices when planning for retirement
Plan a withdrawal strategy that works for you
Optimize your tax situation in retirement
At TrueWealth Financial Partners, we specialize in helping you make a smooth transition into retirement. We understand the nuances of ASRS, the retirement timeline, and how to coordinate all your income sources for maximum benefit.
As a fee-only fiduciary, we're legally and ethically obligated to act in your best interests, never earning commissions on products we recommend.
Ready to maximize your final working years? Schedule a free consultation today, and we can discuss your personalized retirement benefits strategy.
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FAQs
Can I retire before I'm eligible for my full ASRS pension?
Yes, but you'll face significant penalties. If you retire before meeting retirement age requirements, your pension will be permanently reduced.
What if I need to access my ASRS contributions before retirement?
You can request a refund of your contributions if you leave state employment, but this forfeits all future pension benefits and employer contributions. You'd have to repay everything with interest if you return to state employment and want to restore your service credit. This is rarely a wise financial decision.
Does ASRS have a cost-of-living adjustment (COLA)?
ASRS pensions do not include automatic cost-of-living adjustments. Your monthly benefit stays the same regardless of inflation, which is why supplemental savings like your 457(b) and HSA are crucial for maintaining purchasing power throughout retirement.