Retirement Insights

Building a Wolf-Proof Retirement Structure

By Karen Gilgoff

Experts in financial planning say that retirement savings should resemble a brick house, with Social Security as the foundation, an employer pension plan as the first floor, and a second floor made up of investments and bank accounts. Want to construct a retirement house that no amount of huffing and puffing can ever blow down? Here is some useful information that will help keep the wolves at bay.

Your Social Security Statement

The Social Security Administration (SSA) currently sends annual statements to nearly everyone who has ever worked in Social Security-covered employment and is not yet receiving benefits. If you fit this category and are over 25, you can expect to get an updated statement about three months before each birthday.

SSA started the annual notifications in 1999 to provide workers with an important retirement-planning tool. Your personal statement lists earnings for every year in which you contributed to Social Security. It even shows earnings from part-time jobs in high school. When you get the statement, be sure to check those amounts for accuracy and report any mistakes to SSA. Accuracy is important: Your earnings record will determine the size of your retirement benefits.

An estimate of future benefits is another feature of the Social Security statement. SSA averages all your past earnings and projects future earnings based on your work history. A complex benefits formula is then applied. The result amounts to a rough estimate of the monthly amount you will eventually receive from Social Security.

Using this information, you can estimate the additional income you’ll need to maintain a comfortable lifestyle in retirement.

Workplace Savings Plans

Unlike the majority of American workers, most AFSCME members are eligible to join traditional, employer-sponsored pension plans. A good pension greatly improves the solidity of your brick house. Your employer can usually provide an estimate of your future pension benefit. Add it to your estimated Social Security check and see how much more you’ll need to save in order to reach your income goal.

Your employer may be able to help you there as well. Many public-sector employers offer tax-deferred savings plans in addition to traditional pensions. Known as 457s (after a section of the tax code), these plans are offered to employees of all 50 state governments, as well as dozens of local governments. In addition, many school districts and universities (as well as non-profit organizations) offer comparable savings vehicles, called 403(b)s. Both are similar to 401(k) plans in the private sector.

All of the deferred savings plans provide wonderful savings features. The money you contribute is in pre-tax dollars, so you’ll lower your tax bill for the year and be able to contribute more. You’ll be offered a choice of professionally managed investments, generally stock and bond mutual funds. These investments will grow tax deferred. You’ll pay no taxes until you start making withdrawals at age 591/2 or later. (Almost all earlier withdrawals are subject to 10 percent penalties and immediate taxation, except in certain circumstances.) The earnings on your tax-deferred investments will compound year after year, adding dramatically to the total.

Sometimes an employer will match an employee’s contribution to a workplace savings plan, making it even richer. But that is more likely if the plan is substituting for a traditional pension.

IRAs

If your employer does not offer a 457 or 403(b) plan, you may qualify for the next best thing: an Individual Retirement Account (IRA) from a bank or stockbroker.

The traditional IRA closely resembles a workplace-savings plan. Rather than allowing pre-tax contributions, however, the contributions are merely tax deductible, which is less advantageous to the individual. In addition, tax-deductible IRA contributions are capped at $2,000 a year, thousands less than the contributions allowed in workplace plans. But IRA investments (usually in mutual funds) do grow tax-deferred — a great advantage over ordinary savings. Penalties are similar to workplace plans if funds are withdrawn before 591/2.

A popular variation is the so-called Roth IRA. Contributions are neither tax-deductible nor made with pre-tax dollars. The investment earnings, however, are tax free. Once you start withdrawing funds from your account (at 591/2 or later), you will never have to pay taxes on the proceeds.

To find out more about IRAs — both traditional and Roth — consult financial planning guides at your local library. And start laying the floors in that wolf-proof brick house.

Webmaster's Note: Did you know that you can request a copy of your Social Security statement via the Internet? Go to http://www.ssa.gov/mystatement/.