December 6, 2009

A "Diet" for Your Budget?

I had an interesting dialog via email this week with one reader that questioned why she should and how she could afford to save for retirement beyond her TRS pension.

It all started with a simple question - "Why should I save more than my TRS pension will give me?" A good, thoughtful question, and one that I thought I had covered rather well.

In my response, I noted that the educator was not paying into Social Security (SSA), did not have 10+ years of SSA earnings anyway (she is young), and the county she worked for did have a small supplemental pension - but it would not kick in before age 65. I also noted that in her gross pay, 5.2% was passed on to her net pay that would have been contributed to SSA (SSA is actually 6.2% but the county supplemental pension contribution was 1%).

I further tried to explain that between full retirement (30 years) and age 65 (supplemental pension) that the only income that was guaranteed to be distributed was her TRS pension. As educators, one of your most valuable benefits is your pension, but this does not mean that it is everything you will ever need. Granted, it is a good pension and about 60% of your highest salary, but from 100% to 60% is a big jump with no other income stream.

My new friend conceded that this was a big gap to fill, but she wanted to know why she was not really educated on this fact and why she was responsible for it. I was shocked at the second part of the question.

Looking at just the second part of the question - why she is responsible for her retirement income - can be a very touchy subject. My argument though is pretty simple - at some point, you are responsible for yourself.

In the business world, most employees have a 401(k) which along with SSA is their retirement (there are few pensions remaining anywhere outside government). The onerous is on the employee to contribute to the 401(k) and with matching and/or discretionary contributions from the employer, the employee will hopefully build a retirement account that can be drawn upon through the rest of their life. If the employee does not contribute enough, takes too much, makes bad investment decisions, etc., when then account is gone, the income stops. No more income (outside of SSA) from all of the years they worked. I think this opened her eyes.

As for the financial education of our educators, I really have no response. I believe that the counties are doing what they feel is an adequate job talking to their employees, but are they really getting the message across? I have never attended or spoken at a "teacher orientation" or a "back to school" meeting, but I believe that these subjects are covered. Maybe some "shock and awe" would be better served to explain what will happen at retirement...

Getting back to my young friend, she started to understand that contributing just half (2.6%) of the 5.2% of what would have been her SSA contribution would become a large benefit for her at retirement - and she wants to grow the contribution from there every year. She also figured out that since it was pre-tax, her net check would not be nearly impacted like she first thought.

The most interesting thing she said though was that her new contributions to her retirement plan were going to be her "diet for her budget." It was not something she wanted to do, but in the end, she knew it would help her financial health.

Granted, I am not an educator, but I think I just saw that little light bulb flash on.

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