What You Need to Know About Alaska State Retirement Benefit Elections
The State of Alaska Retirement System offers many benefits to SOA employees, but do you know if you are making the most of the retirement benefits available to you?
The truth is, with an abundance of benefits options, you can get easily overwhelmed with all the choices. You want to make the best choice, but navigating what is available to you within the SOA Retirement System is challenging.
Working with a financial advisor who is well versed in the State of Alaska Retirement System is a significant first step. As a SOA Employee, you need to ask the right questions that lead to the best decisions regarding your plan and retirement.
Here are five common questions SOA employees have and what you need to know BEFORE you retire.
Is My Plan Good Enough?
As a State of Alaska employee, you don’t have the option of choosing a defined contribution plan or a defined benefits plan. After June 30, 2006, everyone who entered on duty is only eligible for the defined contribution plan. This raises a more nuanced question:
Is my State of Alaska Defined Contribution Plan good enough compared to the State of Alaska Defined Benefits Pension Plan?
Both plans offer benefits as well as some possible downsides. We are most focused on how these two plans compare in terms of retirement income benefits in this article.
The PERS or TRS Defined Contribution Plans are plans you contribute to an investment account, along with matching contributions from your employer, to fund your retirement. You have more control over the types of investments in your account with the defined contribution plan.
The defined contribution plan’s value is determined by the performance of investments over time. If those investments perform well, your retirement account will grow to reflect it. However, poor performance over the life of the plan could result in the need for additional retirement income.
A PERS or TRS Defined Benefits Pension Plans are plans in which you are promised a specific pension payment in retirement based upon your tenure, age, and job position upon retirement. These plans provide a pension benefit based on your final wages and years of service.
The defined benefits pension plan offers security in a guaranteed amount of retirement income. However, if it is not enough to fully fund your retirement, additional income may be necessary.
Both pans work and can be effective depending on your retirement goals and the amount of risk you are comfortable assuming.
Should You Take Advantage of the Long-Term Care Policy or Not?
When it comes to long-term care (LTC), the future is unpredictable. The two biggest questions you will have are:
- How long will I need it?
- How much will it cost?
*See graphic below.
Long-term care insurance policies can help cover expenses as you advance in age. When you retire, you can choose a LTC election. However, you must decide when you retire if you want this option as it cannot be added later. The most important factor to consider is your health, then assess the extent of your financial resources. If you can comfortably afford it, electing to buy one of the several State of Alaska offered LTC policies may be a great choice.
However, if you are healthy, own your own home, and have other financial resources from which to draw, then you have the option to use your home and personal assets to pay for long-term care instead of an LTC policy.
- Long-term care expenses like living in a facility can be exorbitant. However, it’s essential to have the right perspective. You likely won’t need to drive a car, shop at grocery stores, etc. Your other lifestyle expenses will be dramatically reduced during the period you are paying these elevated medical expenses. Also, home care is less expensive accordingly.
- Like COLA, these expenses are reduced if you go out of state. Given that long-term care in Alaska is one of the most expensive in the nation, this is a realistic limitation and not a deal-breaker.
- Long-term care is an acceptable and suitable reason to assume debt on your house.
- A HELOC or reverse mortgage can generate cash flow from an otherwise illiquid asset. Besides, you can’t take your house with you.
- You will most likely not use all the equity in your house anyways (again, see graphic). You can always pay debt off or not use a line of credit if you don’t need it.
If you are uncertain about your state of health or expect family-history-related health problems, SOA LTC may be a great addition to your plan.
What Medical Benefits Can I Expect?
As a state of Alaska public employee or teacher, you have several healthcare options available to you for retirement.
- Suppose you are a participant of the Defined Benefit Plan. In that case, you are automatically enrolled in the Alaska Care Defined Benefit Retirement Health Plan at no cost to you or your eligible family.
The Defined Benefit Retirement Health Plan offers the lowest premiums and the lowest out-of-pocket expenses option ($800 after the deductible) for you and any qualifying member such as your spouse or eligible dependent children.
Given that individuals 65 and older spend, on average, $6,840 a month on healthcare expenses according to the US Bureau of Labor Statistics, compared to current costs, this benefit creates significant savings for public employees and teachers with this plan.
- Suppose you are a participant of the Defined Contribution Plan. In that case, you may choose Alaska Care Defined Contribution Retirement Health Plan, or you can choose a Medigap plan, a Medicare Supplement Insurance that fills the gaps in Original Medicare.
While you will likely have higher premiums and out-of-pocket expenses ($6,000 max for family) with the Defined Contribution Plan, the longer you work, the more you can reduce your premiums.
With your PERS 4 Direct Contribution Plan, you may also be wondering if you should purchase Alaska Care Retirement Health Plan or Medigap coverage instead?
Strictly from a financial advice point of view, if you can retire from the system with ten years of service, the better option may be to purchase Alaska Care with the lower expected premium contribution than to choose Medigap coverage.
This is because your Alaska Care Retirement Health Plan will not be subject to Medicare treatment limitations. In-network options are more extensive than what is available through medicare alone.
What Social Security Benefit Can I Expect?
As a public employee in the State of Alaska, you do not contribute to Social Security. Therefore, you are not eligible to receive Social Security benefits, based on this work record.
The reason behind PERS and TRS employees not being included in Social Security dates back to when Social Security was enacted in 1935. Upon its creation, public employees were not eligible for it.
Fast forward a few decades, public employee and teacher retirement systems each created a pathway to participate in Social Security through an opt-in election. However, both State of Alaska retirement systems (Territorial Teachers Retirement System at the time for what is now TRS public employees) did not voluntarily elect the coverage.
While PERS eventually established a Supplemental Annuity Plan in lieu of Social Security and the Police and Firefighters later qualified for Social Security, teachers of TRS never established a system to offset their original opting out of Social Security.
If you ever worked at a job that did qualify for Social Security, the State of Alaska pension you receive will reduce the amount of your Social Security benefit from your other eligible Social Security employment based on the Windfall Elimination Program and the Governmental Pension Offset for the benefit of their survivors.
Can I Defer (or Accelerate) My State of Alaska Benefits?
The short answer is yes! It is a great option to exercise if you choose to retire earlier than the typical retirement age of 65. First responders or law enforcement may be forced to retire at 57 as an example but are eligible to retire as early as age 50 with 20 years of service.
If you don’t need to start collecting your benefits as soon as you retire as a public employee or teacher, you can defer your compensation. By deferring your pension compensation, you can put more money into pre-tax savings if needed.
Deferring your retirement compensation can help you create an income bridge until you are eligible to receive your defined benefit pension or access your PERS/ TRS accounts, such as the defined contribution or supplemental annuity plan, without penalty.
If you have separated from service with the State of Alaska, you are eligible to start receiving your PERS pension at age 60, regardless of other employment. Be sure to elect this benefit at age 60 to receive all eligible benefits. If you activate it at a later date, you will not receive back payment of uncollected benefits.
Where to Go from Here
Making the most of your State of Alaska retirement benefits goes beyond simply making your mandatory contribution or if you should be maxing out your elective employee contributions. What is covered here merely scratches the surface of what you need to know about your retirement benefits as a State of Alaska employee.
The important thing to remember is that you don’t have to figure it out on your own. Working with a fiduciary fee-only financial advisor who is deeply familiar with the State of Alaska Retirement System can help you make sense of your retirement benefits.
Schedule a call today and ensure your retirement is secure.