Get retirement plan ready or die early

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Published: June 6,2010

Tags: column, MBJ, Nancy Anderson, retirement

The idea of retirement, much less a plan to cover it, is a modern one. In most countries, Grandma just moves in with you when she can’t support herself anymore. General Motors started the first private retirement plan in 1950 in the United States. It was a defined benefit plan, also known as a pension. Since then, U.S. employees have come to expect some type of retirement plan within their benefit package.

The State of Mississippi offers two types of plans. One is the old pension plan that pays guaranteed monthly payments to retirees based on their years of service and average salary. Around here, it is affectionately known as PERS. About 170,000 people actively contribute to this plan through mandatory payroll deductions. The system is currently supporting about 80,000 retirees. 

Pension plans are becoming rare. Because they require employers to set aside money and invest it to prepare for the guaranteed payments, the risk is borne by the employer. Private retirement plans are governed by a federal law called ERISA. These plans are contractual, and employers are required to assure the security of the plan through proper funding and sound investing.

These requirements have led many employers to move to defined contribution plans. They are the  401(k)s, 403(b)s, etc. that place all the risks for retirement on the shoulders of employees. Contributions are voluntary. Investment choice is up to individual employees. Besides offering a vehicle for retirement saving and negotiating with providers, employers are off the hook.

I have met with many soon-to-be-retiring state employees through the years and have been impressed with their retirement benefits. With a state pension, Social Security and potential payments from Deferred Compensation, many end up bringing home more in retirement than when they were working. Newer employees aren’t as lucky.

PERS is funded by contributions from the state and contributions from the employee. Employee contributions amount to 7.25 percent of their salaries. If you work for the state, this comes off the top. If your salary is $36,000 per year, $217.50 is taken out of your paycheck each month and goes into your PERS account.

Many state employees complain of low wages and the burden of this forced contribution, but the pay-off in retirement seems to ease the pain. In addition to a nice pension, an extra check arrives in the mail each year. The cost of living adjustment accounts for inflationary pressure. At some point, COLA payments are compounded, making this a nice annual bonus for any retiree.

The State of Mississippi also offers a defined contribution plan. This is called Deferred Compensation and allows for additional retirement savings. There are no guaranteed payments in retirement for Deferred Compensation. It’s simply a 401(k) plan, just like what most of us in the private sector have. It’s a great way to save and keeps your money out of the reach of the IRS.

Add in decent healthcare benefits, generous sick leave, vacation time and several holidays, and you have a pretty good employment deal. You won’t get rich being a state or municipal employee, but you’ll have a stable job with good benefits and the promise of a secure retirement.

Like many employers faced with the commitments on the old pension plans, the State of Mississippi is facing some tough choices. The current budget crunch is colliding with an aging population, throwing a wrench in the state retirement system. As life spans increase, the monthly commitment to former state employees grows. Employer contributions have been increased over the years to account for this change, but Mississippi’s budget is getting stretched because of the system. Add in a cantankerous stock market, and you have a funding problem.

Gov. Barbour just approved a measure to increase the mandatory employee contribution to 9 percent. Now, that $36,000 salary will be reduced by $270 each month to help with funding. For state employees, this is a blow. That extra $60 per month reduces an already low salary and results in an adjustment to their family budgets. In addition, state employees are now being asked to contribution to health insurance coverage. It’s a double whammy.

State plans aren’t under ERISA but are governed by guidelines specific to each state. Mississippi legislators are taking seriously the promise to retirees by making sure funding is adjusted. No one likes to pay more, but I commend the governor for insisting on the increase in employee contributions. In return, the state is agreeing to increase their contribution rate from 12 percent to 13.56 percent. Employees have also been given some “soft” benefits to help them swallow this pill. Ultimately, a secure system is to everyone’s benefit.

The opportunity to hang on to a pension plan is a valuable one. Few private sector employees have this option. For those of us dependent on the new 401(k)s and such, it’s time to take a serious look at those plans. Average contribution rates are in the 4-5 percent range. Unless we want to spend our retirement pinching pennies, this is NOT going to cut it. In addition, many employers have stopped matching contributions, and the stock market has dealt critical blows to many of our accounts. Government plans with all their problems still look like sweet deals compared to what the rest of us are facing.

State employees are being forced to ante up more money for their plans. The rest of us need to follow suit by increasing our retirement contributions. We also need to look at how our money is being invested. We may need to get more aggressive as we try to make up for the last few years in the stock market. The modern retirement plans of the 1950s are making way for the new 401(k)s of this century.  Unless you believe your children and grandchildren will step up to the plate, I suggest you get serious about your retirement plan. If you don’t, plan to die early!

 

Nancy Lottridge Anderson, Ph.D., CFA, is president of New Perspectives Inc. in Ridgeland, (601) 991-3158.  She is also an assistant professor of finance at Mississippi College. Her e-mail address is nanderson@newper.com, and her website is www.newper.com.

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