4 Questions You Must Ask Before You Retire with Your State Retirement Plan
As a State of Alaska employee, you have access to excellent retirement benefits. However, you may worry that your state retirement still doesn’t fully meet the financial needs of the life you envision after working.
Thankfully, you can take advantage of several options to bolster your retirement income and ensure your golden years are secured the way you need.
To better understand your retirement outlook and whether or not you need to consider additional wealth-building options, let’s explore four key questions.
1. Are you making the proper elections in your PERS or TRS?
We need to start with the basic retirement benefits available to you as a State of Alaska employee. Within your PERS or TRS you have several elections and additional options. Here are some of the most important to understand in regards to your retirement:
- Survivor Election for Defined Benefit Plan – If your spouse outlives you, will their survivor benefit ensure they don’t outlive their income? Are they older than you and less likely to need it?
- LTC Election for all members – Do you expect to have low, average, or high end-of-life health expenses based on your specific circumstances? Do you have other assets that can be used to access equity for paying long-term expenses?
- COLA Allowance for Defined Benefit Plan – Are you planning on moving out of Alaska when you retire? If so, you could lose your COLA allowance.
There are also some retirement income options to consider depending on your tier and service credits:
- Retirement Medical Benefits – Most likely, your health insurance coverage in retirement won’t be the same as your coverage while working. However, you could be eligible to receive additional medical benefits depending on your tier and the amount of service credits you have. You can learn more about those options here. However, it may be in your best interest to speak with a financial professional who can explain your options clearly based on your unique circumstance.
- Pay Indebtedness for Service Credits – You may be able to retire sooner because of additional service credits. To do this, you may need to pay off your TRS or PERS indebtedness. Do you have available liquid assets (or an eligible retirement account) that can pay the indebtedness to receive the service credit? You will need to weigh the cost to decide if it is worth it.
- Vesting – Eligibility for certain retirement and medical benefits in retirement are dependent on whether or not you are vested. Is working additional years or possibly going back to work for an employer with state retirement benefits worth it? If your expected medical costs or desired personal expenses are high, this must be in consideration.
Making the proper elections in your state retirement system and being aware of the options available to you are crucial as you look toward retirement. Talk to a financial professional who understands the often complicated details of your State of Alaska employee retirement options.
2. What are the tax implications of your retirement income?
One of the most important, yet often overlooked aspects of retirement planning is taxes. Without a clear understanding of how taxes are paid on your retirement accounts, you could end up with less retirement income than you expected due to a hefty tax burden.
Most of the SOA retirement accounts are pre-tax, including those that receive mandatory employee and employer contributions. This means that you don’t pay taxes on contributions, but do pay taxes on withdrawal in retirement. This makes your retirement income subject to the tax rate at withdrawal. If your income is higher when you retire, then that money could be subject to a higher tax rate.
One exception is the optional employee contribution Deferred Compensation account, which can be either a traditional or Roth IRA. Contributing to both pre-tax and after-tax Roth accounts can provide important income flexibility in retirement that can significantly lower your lifetime tax liability.
A good strategy may be to make Roth conversions from your pre-tax supplemental annuity or Defined Contribution account after you retire and before you are required to take RMDs. This will reduce lifetime tax liabilities and give you some flexibility. Here’s why:
Maintaining a consistent tax rate is more efficient than paying high taxes now and lower in the future or vice versa. Therefore, it can make sense to convert pre-tax funds to a Roth IRA during your low income years to prevent the big tax spike that can come when you are forced to distribute money from pre-tax accounts at age 72.5.
Also, you can avoid large expenditure tax hits during retirement by making Roth conversions during lower income years or after you retire. For example, you might live comfortably on your retirement income from pensions and investment withdrawals. However, what if you should need to make a large distribution from a pre-tax account to pay for a second home, RV, or an unfortunate medical event? Every dollar of distribution on pre-tax retirement accounts will be considered income, and a large withdrawal could equate to high income and therefore a higher tax rate. Roth conversions will give you flexibility to make larger expenditures without incurring unexpected taxes, thereby preventing you from giving away more money than necessary to taxes.
It’s best to work with a tax or financial advisor to maximize Roth conversion tax benefits for your specific situation.
3. Is your current retirement savings enough?
Far too many retirees struggle with the nagging worry associated with retirement income. The age old question is asked by nearly everyone at some point: Will I have enough income in retirement?
While you may be due to receive a pension from your service as a State of Alaska employee, there is a good chance that pension alone won’t sustain the lifestyle – or expenses – that your retirement plans demand.
A great place to start is with the State of Alaska Retiree Net Pay Estimator.
This tool will allow you to compare your net pay in retirement to your active net pay amount to see how close you are to being able to reach your retirement goals. Which brings up a crucial point: Do you have clearly defined retirement goals? If not, meet with a financial advisor now so you know exactly what you need to do to make your ideal retirement a reality.
Also, if the markets were unchanging, it would certainly make retirement planning much easier. However, with fluctuating markets, your retirement income could be at risk. It’s important to manage withdrawal timing pitfalls by structuring accounts – also known as sequence of returns.
When you take money out during a period when the market is down, you diminish the lifetime rate or return of your portfolio. While this seems like some fate you can’t control, this situation is avoidable. Work with an advisor to build a portfolio that can pay you consistent retirement income during sustained down markets and that won’t run out of money.
Like many others, you may find that your current retirement plan and savings are insufficient for the retirement you want. If you have a pension, you likely still want to bolster your retirement income with other retirement accounts, like IRAs, 403b, deferred compensation, or supplemental annuities.
4. What is the best version of your retirement?
Retirement should be enjoyed. It’s a season you’ve worked hard to reach, and worry shouldn’t be a factor in the life you live in your golden years. As you plan your retirement, take into consideration what you will spend and when you’ll spend the most.
Understanding the Spending Smile
Most people assume that they’ll spend their retirement income evenly over the course of their retirement. However, this is rarely the case. For most, retirement takes place in three stages in which spending fluctuates to reflect your lifestyle. This is known as the spending smile, since the curve on a chart looks like, you guessed it, a smile.
This puts your retirement spending into three stages:
- Retirement to age 75: This is the stage when you will want to travel, spend time with friends and the grandkids, and be more active. You’ll spend more during this phase.
- Age 75 to 85: This is the stage in which you’ll slow down and travel less. Life mostly takes place within routines at home and spending lessens.
- Age 85+: During this stage of retirement, your spending will increase to reflect end of life rising medical costs.
To ensure you have the retirement income you need to live the life you want, planning makes all the difference.
If you’d like to create a plan for your retirement, let us know. With a comprehensive wealth management plan you can not only set yourself up for a worry-free retirement, you can also ensure your wealth outlives you, establishing your legacy to future generations.
Talk with us today and find out what’s truly possible in retirement.