Kemmeth O'Connor, Local 11, OCSEA

Local 11/OCSEA

Kem dreams of traveling when she retires. The 34-year-old project coordinator earns $34,000 a year working for the state of Ohio and is taking classes toward her associate's degree. She gets $200 a month in child support from her ex-husband, has a mortgage to pay and hopes to fund half of 9-year-old Kendra's college education.

Where does all this get her? With 11 years of service to the state already under her belt, Kem is well on her way to earning a state pension of 63 to 75 percent of her highest annual salary. Kem's state pension also substitutes for Social Security, because Ohio -- like Maine, Massachusetts, Nevada and Alaska -- does not participate in the Social Security system.

Kem has participated in a retirement savings plan for as long as she's been a state employee. Like a defined-contribution plan, this involves regular contributions to a personal investment account. Unlike a defined-contribution plan, however, this supplements Kem's standard pension rather than replacing it. The retirement savings plan -- sometimes called a deferred compensation plan -- also offers Kem the benefits of tax deduction and tax deferral, meaning that she pays no taxes on the money contributed or on her earnings in the plan until she withdraws them.

Kem has saved $13,000 in the plan so far and -- though money has been "tight at the end of the month" since her divorce -- she continues to contribute over $200 a month.

"I feel like I'm rebuilding myself, but in a new direction," she says of her time since the divorce.

Financial planner Joseph Harper of Columbus, Ohio, examined Kem's finances and applauded the following successes:

• Enrolling in community college. An almost sure-fire way of increasing your current salary, going back to school is also a great way to increase your retirement income, because pensions and Social Security are based on your salary.
• Repairing a bad credit history. Divorce can take its toll on your credit rating as it did for Kem, making loans more expensive and leaving far less money to put away for retirement. By repairing her credit rating, Kem has recently qualified to refinance her mortgage at a far lower rate, giving her $3,000 more a year.
• Saving regularly. Pay yourself like you pay the mortgage or the rent, even if it's $10 a week. Kem's steady approach has added up.

Harper notes that, while there is an outside chance of Kem's fulfilling her dream retirement by leaving work at age 54, her plans easily could be waylaid by changes in the rate of inflation, her investment returns or her need for income. The following recommendations, based on the assumption that she'll need 75 percent of her final salary to have the retirement she wants, will give her a cushion.

• Stay at work a few more years. Working longer is one of the best ways to increase the payout from traditional pension plans. By working until age 60, rather than 54, Kem can raise her pension from 63 percent of her highest annual salary to approximately 75 percent.
• Become a more aggressive investor. With 95 percent of the money in her retirement savings plan invested at a fixed rate of return, Kem opens herself up to the dangers of inflation. Investing a certain percentage of her savings in stocks -- which carry a higher risk, but also offer a higher return -- may be the best way to guard against that. Kem, like other investors with 10 to 20 years to wait out the market's ups and downs, will do better in the market than in bank accounts or bonds, if past performance is any indication.

Kem was surprised by Harper's analysis. She says she's doing better than she had thought, and plans to take much of his advice to realize her dream retirement. Taking the time to do some planning, she says, helped her realize that "I do have a chance at that goal."