Sunday, February 17, 2008
The symbolic three-legged retirement stool of Social Security, pension and personal savings has developed a wobbly reputation.
News stories about underfunded or frozen pension plans have the more than 20 million workers covered by defined-benefit pensions wondering whether they should count on that money, or save as though they’re on their own.
Take Kristin Thompson. The 27-year-old data management analyst for the Metropolitan Council in the Twin Cities has roughly four decades until she plans to stop working.
She’s banking on the pension being there, but she has no idea how much it will be worth and how much extra to save. So should she set aside 10 percent of her income toward retirement “on top of the pension?” Or should she be saving “more, less, or as much as possible?”
Social Security, of course, is a whole other story to be played out in Washington for generations to come.
Meanwhile Thompson, who is still paying off some debt, deposits $100 per month into her after-tax retirement savings account, called a Roth IRA. Her goal is to max out annual contributions to that account by age 30.
The maximum IRA contribution for 2008 is $5,000 for those younger than 50 and $6,000 for workers 50 and older.
The question of how much to save depends on how much life will cost. Granted, Thompson may decide that a retirement filled with traveling, volunteering and walking the dog isn’t for her. But having an idea of whether she plans to live extravagantly or simply after she retires from the 9-to-5 gig can help her decide whether to save a little or a lot.
Certified Financial Planner Charles Buck of Woodbury, Minn., generally advises younger clients to save between 10 percent and 15 percent of their salaries. That range includes any employer money — whether in the form of a 401(k) match or a pension benefit. For example, if you receive a 3 percent match from an employer, then shoot for saving between 7 percent and 12 percent out of your own pocket.
But Buck doesn’t even plug pension numbers into a savings formula until a client is 40 or older. Instead, he emphasizes that workers such as Thompson concentrate on developing the habits of saving and spending less than she makes.
Dave Bergstrom, executive director of the Minnesota State Retirement System, responded similarly. Plus, “when you’re 27, are you sure you’re going to stay in state government?” he points out.
Because Thompson is vested, if she leaves the state she could withdraw the employee money accumulated so far in her account, plus interest.
But Bergstrom advises against that. Even though a pension benefit can be tough to estimate and may seem of little value, take out the money and “you’re forfeiting a monthly pension that could have far more value” down the road.
He advises employees to check their annual benefit statements and meet with a pension counselor who can help them project future benefits.
After 10 years, for example, a state employee such as Thompson will have earned 17 percent of her salary based on her five highest-earning years, also known as her “high-five” salary.
The more years of service, the more valuable the pension. If she works there 30 years, she can expect about half her high-five average salary.
Thompson’s current job pays between $47,000 and $71,000, but who knows how much she’ll earn decades from now?
The advice to pay little attention to the future value of your pension early on in your career is not a satisfying answer.
But it drives home the point that it won’t be enough and that you’d best start saving today.
After all, ever heard anyone complain about having too large of a nest egg?