Importance of Planning for Retirement

As a State of Maine employee, you have two different vehicles to help you achieve your retirement dreams; the Maine State Retirement System Defined Benefit Plan (“Defined Benefit Plan”) and the State of Maine’s Deferred Compensation Plan (“Deferred Compensation Plan”). Here are a few questions to gauge how prepared you are for retirement and help you put a plan into action today.

• Have you started saving for retirement outside of the Defined Benefit Plan?
• Have you estimated how much money you'll need during your retirement years?
• Have you set a retirement savings goal and if so, are you saving enough to reach that goal?
• How does the Deferred Compensation Plan fit into your retirement planning?
• When was the last time you reviewed your Deferred Compensation Plan investments to determine if they are still appropriate for you?
• Do you know where to get more information on the Deferred Compensation Plan?

Take a Look at Your Sources of Retirement Savings

It’s important to take advantage of both of the State’s programs. Eligible employees automatically participate in the Defined Benefit Plan through regular contributions that are set aside from each paycheck. Once you are vested in the plan and eligible for a benefit, you will receive a monthly benefit for life from the Maine State Retirement System. For example, an employee who retires after 20 years of service and whose average three highest years of compensation is $50,000 will receive an annual benefit of $20,000 ($1,667 per month).

If you would like more information about your retirement benefits, you may:

• Consult the MSRS Benefits for State Employees booklet available from MSRS or at www.msrs.org,
• request an estimate of your monthly retirement benefit from the Maine State Retirement System, if you are within one year of retirement, or
• call the Maine State Retirement System at any time to find out the current value of your accumulated contributions.

In contrast, the Deferred Compensation Plan is a voluntary program that can help supplement the monthly benefit you receive from the Defined Benefit Plan. Traditionally, many of us have viewed the Defined Benefit Plan as a means for paying our everyday expenses or bills during retirement, and considered the Deferred Compensation Plan as the source for any extra expenses, such as travel and leisure costs. But there are several factors that may make participation in the Deferred Compensation Plan necessary to make your retirement dreams come true. Post-retirement costs are rising (see “How Much Will You Need?”) and life expectancies are reaching into the 80s, which means you may spend roughly one third of your life in retirement. These two factors tend to increase the amount of money you’ll need to save for retirement. So, it’s important that you take a close look at all your sources of retirement savings, including both State-sponsored plans and any other personal savings you may have.

How Much Will You Need?

In addition to looking at your sources of retirement income, you should try to estimate what your expenses will be during your retirement years. Financial advisers generally agree that you will need 70%-80% of your annual pre-retirement income for every year in retirement, which means you need to accumulate a lump sum balance of roughly 10-15 times your current annual income by the time you retire. Many of your everyday expenses like utilities, food, and clothing will still exist in retirement and some expenses may even be higher during retirement. For example, medical costs have continued to increase every year, and you may spend more money on leisure activities or travel. Many retirees underestimate the cost of healthcare and what they may have to pay out of their own pocket for it. One of the things you should look at is if you are eligible for post retirement health coverage from the State, and how the related cost reduces your monthly benefit from the Defined Benefit Plan.

In addition, most Americans are not eligible for Medicare coverage until age 65 and Medicare doesn't cover all medical expenses. You have the option to purchase Medigap supplemental insurance to cover some of these additional expenses, but even Medigap does not pay for things like long-term care, eyeglasses, dental care, or unlimited prescription drugs. More information on benefits payable by Medicare and Medigap insurance is available at www.medicare.gov.

Your FSO can help you develop your retirement strategy ― including estimating your retirement expenses ― and set a realistic goal for yourself.

Is Your Investment Strategy On Track?

Another component of your retirement action plan will be the investment strategy for your Deferred Compensation Plan account. One of the first items you should consider is how your investments hold up against inflation. The inflation rate over the last several years has been relatively moderate, but you never know when it could begin accelerating. So, it is probably a good idea to factor in an average 3% rate of inflation each year when looking at your investments. Speak with your FSO and determine if your retirement portfolio needs any adjustments to better protect your savings against the effects of inflation between now and your retirement. In addition, you should consider increasing your contributions each year to keep pace with inflation. Remember, when you are contributing to the Deferred Compensation Plan, you are contributing a fixed dollar amount with each paycheck. If inflation is driving up the cost of goods every year, you need to increase your contributions to be able to afford these same items when you reach retirement. You may also wish to increase your contribution rate when you receive a pay increase, so that you continue to contribute the same percentage of your pay.

It may seem impossible to know if you have the perfect plan in place today, and many things can change between now and retirement. But any planning you do now will certainly help your ability to meet your retirement needs tomorrow. Follow the Retirement Planning Checklist to jump-start your retirement planning today.