Monthly Archives: April 2015

Then vs. Now: How the Retirement Landscape Has Changed

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Have you turned on your television lately and heard an advertisement by a financial planning company? Your answer was more than likely a resounding YES! Retirement planning has become a huge business and industry. However, it has not always been this way. Let’s discuss where we came from and where we are now.

Prior to the 1930’s, retirement did not exist for the vast majority of Americans. For the most part, people just worked until they died or were physically unable. So, retirement is actually a relatively new phenomenon. In August of 1935 the Social Security Administration was created by the federal government. The idea was to allow people to leave the workforce death or disability.

Defined Benefit (DB) pension plans have been around since the times of the Revolutionary and Civil Wars. However, the majority defined benefit plans were established in the 1950’s and 1960’s. The primary purpose of defined benefit plans was to allow employees to leave the workforce in a dignified manner. And up until the late 1970’s, Social security and a pension were the means by which most of the population was able to retire.

In the 1980’s, Defined Contribution (DC) plans became increasingly popular. When defined contribution plans were established, they were intended to allow an employee to defer some income on a tax free basis for retirement purposes. The idea was that a defined contribution plan could supplement their retirement income they were already accruing with Social Security and their pension. However, the movement has changed in recent years to eliminating pensions and only providing a Defined Contribution Plan. But that may not be the best way to provide retirement security for Americans.

Below is a table illustrating the differences between a defined benefit plan, like Missouri LAGERS, and a defined contribution plan.

DB vs DC

The movement to eliminate defined benefit pensions has created a retirement savings crisis across the nation. Many Americans are unable to leave the workforce in a dignified manner because they have not properly saved and their only other source of retirement income is Social Security. As of March 12, 2015, the median retirement account balance is only $2,500 (National Institute on Retirement Security)! Furthermore, the median retirement account balance for Americans nearing retirement age (55-64) is a mere $14,500 (National Institute on Retirement Security). This is hardly enough to draw from for a person’s retirement.

The original spirit of the defined contribution plans was to be a supplement to a person’s retirement income and not a person’s sole source of financial security. Currently, we are seeing what happens when a person has to rely on Social Security and a defined contribution plan. Americans believe they are going to have to work until they are unable to do so. Social Security, defined benefit plans, and defined contribution plans were intended to all work together to allow hard working Americans to leave the workforce with a little pride and a little dignity. Having all 3 sources of retirement income is the best and most efficient way to accomplish a secure retirement for all hard working Americans.

Jeff Pabst, CRC Public Relations Specialist

Jeff Pabst, CRC
Public Relations Specialist

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How to Know How Much to Save

2015-02-Life-of-Pix-free-stock-photos-watch-desk-keyboard-damian-zaleskiWouldn’t retirement planning be a lot easier if we had a crystal ball? Knowing how long you are going to live and what type of expenses you will have in retirement would make knowing how much you should be saving now a whole lot easier.

Trying to figure out how much to save can feel like a daunting task, and too often, the default is to simply not save at all.  It’s important to remember that your LAGERS benefit was never designed to be your sole source of income in retirement, and even when combined with your Social Security benefit, you will probably need to supplement your retirement with some personal savings.  But how much do you need to save?

When trying to figure out how much you should be saving, one easy approach is to determine what percentage of your pre-retirement salary that you would like to have in retirement.  That percentage will be a little bit different for everyone depending on many factors such as your expected retirement lifestyle, your personal health, etc.  Once you have a goal in mind, here is the quickest way to figure out how your LAGERS benefit will fit into the picture.

Each LAGERS employer elects a specific benefit program under which all of their employees are covered, with multipliers ranging from 1.00%-2.00%.  To determine what percentage of your pre-retirement income will be replaced by your LAGERS benefit, you simply take your employer’s multiplier times your projected years of service.

For example, if you plan to work for 20 years at an employer with the L-7, 1.50% program, you would take:

20 years X .015 = 30%

From this quick calculation, you now know that with 20 years of service under the L-7 plan, you can expect your LAGERS benefit to replace approximately 30% of your pre-retirement salary.  If you are including Social Security in your plan, you can visit www.ssa.gov to calculate an estimate of your future SSA benefit as well.  Once you have figured out how much you think you will receive from your LAGERS and Social Security, you should have a better idea of how much more you should be saving to fill in any gaps.

Too often I hear comments like: “I’m too young to worry about retirement,” or “I’ll worry about retirement later.”  The truth is, the younger you start planning the better off you will be, and while your LAGERS benefit is a guaranteed lifetime benefit, you still need to be saving on your own. Calculating your replacement ratio is a great way to ballpark your future income, even if you are a long ways from retirement.

Elizabeth Althoff Public Relations Specialist

Elizabeth Althoff
Public Relations Specialist

Should Employers Provide Financial Education for Employees?

Student Overwhelmed Asking For Help

 

Financial stress is an issue that touches all age groups and income levels.  Student loan debt, retirement, health care, credit cards, and mortgages are all common concerns for American workers.  A recent survey conducted by State Street Global Advisors found:

  • 60% of respondents said they are stressed and distracted by their financial situations.
  • Half live paycheck-to-paycheck.
  • Almost one-in-four say their productivity has suffered because of financial issues.
  • One quarter said they have missed work because of money-related stressors.

These results don’t seem particularly remarkable.  I mean, we all have issues, right?  Some would say that the employee needs to put all that aside while at work and keep productivity high no matter what.  But let’s face it, this problem isn’t going to fix itself.  The need for financial education is at an all-time high as financial literacy is low among Americans.

So who should provide this education?  More experts are recommending that employers provide financial instruction for their employees.  Why?  Because the benefits are great not only for the workers, but for the employers as well.

Think about it, employers are losing thousands of dollars each year due to low productivity. Some of these losses are due to the financial stress of their workers.   Missed working days, limited focus, and employees retiring on the job are all issues that can cost employers money.     So it now becomes much more than an individual problem, it is an organizational problem.  This is prompting more employers to consider financial wellness education for their employees.

Employers have provided employee benefits education since the first American pension plan was established by American Express Railroad in 1875.  This normally consists of describing the enrollment process, options, and required forms.  However, many think it is time for a more complete approach that includes basic money management skills, budgeting, and investment advice for employees at all stages of their careers.  In an article by Jill Cornfield featured on PLANSPONSOR.com, Fredrik Axsater, of State Street, said “A more holistic approach is needed, providing tools and opportunities for employees to reduce stress and improve their financial well-being.”  Employers are taking notice.   In fact, the Society for Human Resource Management (SHRM) reports that 57% of organizations are now making financial education available for their workers.

The University of Minnesota advocates “Workplace Comprehensive Financial Education” and says that the benefits to employers for offering financial education include:

  • Improved productivity – Enables employees to focus on their jobs rather than financial issues
  • Reduced employee stress – Leads to healthier, happier employees
  • Improved workforce planning – When employees can retire when they are supposed to, employers can better plan for future workforce movement.
  • Attract quality workers and then keep them – Employees generally view their employers as trustworthy sources of information. Providing these services for employees can be a very attractive benefit.

So what do you think?  Does an employer have any responsibility whatsoever to ensure its employees are fiscally fit?  Or is this the responsibility of the individual?

 

Jeff Kempker, RPA, CRC

Jeff Kempker
Manager of Member Services

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LAGERS Legislative Update

With Legislative Spring Break now behind us, legislators are sharpening their focus on the final few weeks of the 2015 session.  LAGERS has been hard at work on several important pieces of legislation, so  I thought I’d give our readers a quick update on where LAGERS’ bills stand and what we expect to see in the coming final weeks.

LAGERS knew entering the 2015 session that our top priority was going to again be our “Local Plans” bill.  As Jeff wrote about back in December, this is legislation that LAGERS pursued at the request of several LAGERS members with frozen pension plans who wished to transfer the administration of those plans to LAGERS.

Following the Governor’s veto of last year’s bill, the slightly modified language in this year’s bill has again received overwhelming support in both chambers, with none testifying in opposition.  As of this blog’s posting, House Bill 494 has been voted out of committee and is awaiting perfection before heading to the Senate.  Companion bill, Senate Bill 283, has already been perfected by the Senate and sent to the House.  LAGERS expects both bills to continue moving as we approach the last few weeks of this session, as this is win-win public policy for all Missourians and their local communities.

Another focus during this session for LAGERS is a second piece of legislation, House Bill 643, which would allow employers the option to elect to cover emergency dispatchers, EMS personnel, and jailors as ‘Firefighters’ or ‘Police Officers’ for LAGERS purposes.  Expanding the definition would allow those employers to provide an earlier retirement age of 55 as the full retirement age for those covered employees.  This bill has also been voted out of Committee without anyone testifying against the bill and is awaiting perfection by the House before moving on to the Senate.

As with most legislative sessions, there are a handful of other bills that LAGERS continuously monitors to ensure that the LAGERS system, our members and retirees have a voice at the capitol.  LAGERS staff works diligently to educate our policy makers on the value of the services our members provide to their local communities and the benefits of having a defined benefit that allows Missouri’s hard working public servants to retire with a little dignity and security.

To keep track of all legislation with potential impact to the LAGERS system, check out our bill tracker!

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