January 2014 DC Update
How much is enough?
Adding It Up: Income Replacement Sources in Retirement
In last month's “Adding It Up”, we looked at how increasing contributions now could affect your savings, and resulting monthly income, in retirement. In this month’s update, we’ll explore how much income you’ll need in retirement, what you can expect to receive from two major income sources, and what steps you can take now using a third income source to work toward financial stability when you do quit working.
Remember, your deferred compensation plan balance is designed to supplement other income in retirement, most notably pension and social security benefits. Most experts agree that you should aim to replace at least 80% of your preretirement income when you leave work. That means if you made $3,000 a month when you were working, which is the average for a state of Missouri employee entering retirement*, you would want to receive at least $2,400 a month when you do leave work. But how much will your pension and social security provide as you work toward that 80% income replacement level? To answer this question, it’s crucial to understand the factors that go into calculating each benefit and the resources available for estimating how much each will provide.
Your pension benefit is calculated by taking years and months of state service times your final average pay or “FAP” (the average of your highest 36 consecutive months of compensation) times a multiplier established by law.
For an average state of Missouri employee retiring under the MSEP 2000 plan* that calculation would be:
23 years of service x $3,000 (FAP) x .017 (multiplier for an MSEP 2000 retiree) = $1,173 base benefit (39% of your preretirement income)
Both MOSERS and MPERS provide an annual, personalized benefit statement that projects a pension benefit based on your current service history, salary and a retirement multiplier. This statement is typically generated and distributed in the spring.
As you can see, a pension benefit of $1,173 means you’ll need an extra $1,227($2,400 - $1,173) to reach an 80% replacement goal. Social security can help you fill that gap, but can be difficult to estimate because it is calculated using a complex formula that takes into account your lifetime earnings. Additionally, social security benefit amounts vary depending on when you choose to start receiving them. For instance, you can begin receiving social security benefits at age 62, but at a reduced rate**. For a better idea of the amount you can expect to receive from social security, visit their Retirement Estimator tool at http://www.socialsecurity.gov/estimator/. You can also view your official social security statement online by creating an account at http://www.socialsecurity.gov/myaccount/.
These two major sources of retirement income – pensions and social security – could get you near an 80% income replacement level, but for the average state of Missouri employee, a third source of income will be necessary. A supplemental savings option – like the State of Missouri Deferred Compensation Plan – will fill that need.
As the December 2013 DC Update proved, increasing contributions to the deferred compensation plan can enhance your savings in retirement, which, in turn, can improve your ability to reach an 80% income replacement ratio.
While it’s certainly important to familiarize yourself with how your pension and social security benefits are calculated, the deferred compensation plan offers a robust tool that will help you estimate income from ALL SOURCES during retirement, even social security. The tool is RetiremenTrack and it’s a custom calculator designed specifically for state of Missouri employees. You simply enter income, pension and savings information and the calculator will reveal if your current retirement savings strategy will produce your desired income replacement, or if changes are necessary.
Understanding your retirement benefit sources and taking advantage of the tools they provide will help you piece together your retirement income puzzle. The sooner you do so, the better equipped you will be to improve your financial future.
*Data according to MOSERS’ 2012 Member Profile Summary
**Please note: Because many state employees retire prior to age 62, your pension plan offers a temporary benefit until you are eligible to receive social security. Check with your plan for details surrounding temporary benefits.
Employer Incentive Update
Governor Jay Nixon recently announced a proposal to resume the employer incentive – or match – associated with the State of Missouri Deferred Compensation Plan. While this is only a proposal, if it was to pass, the change would be part of the Fiscal Year 2015 budget, running from July 1, 2014 through June 30, 2015. For the employer incentive to be reinstated the Missouri Legislature must first pass the state budget in May of this year and the final budget must be signed by the Governor. Be advised that the State of Missouri Deferred Compensation Plan plays no role in budget proposals or decisions. Stay tuned to our website and social media channels for more news as it becomes available.
Saver's Credit Reduces Taxes
The IRS offers a special tax break – known as the Saver’s Credit – to low- and moderate-income taxpayers who are saving for retirement. The level of credit you receive – 50%, 20% or 10% – depends on your adjusted gross income and filing status in the tax year you made retirement contributions. The table below displays the 2013 limits for utilizing the credit.
Here’s how the Saver’s Credit works: Let’s assume Mike and Susan are married and file a joint tax return. Mike contributed $2,000 to the deferred compensation plan this year while Susan deferred $1,000. Their 2013 combined adjusted gross income (AGI) is $48,000. Because their combined AGI is between $38,501 and $59,000 (the ‘married filing jointly’ limit outlined in the table below) each of them is therefore eligible to claim a 10% credit for their 2013 contributions. Together, their credits are worth $300 (see calculation below).
Saver’s Credit Calculation
Mike and Susan’s combined adjusted gross income (AGI) was $48,000 in 2013. This qualifies them for the 10% credit rate as noted in the table below. Here’s how the calculation works:
| 2013 Contribution Amount to the Deferred Compensation Plan | |
Credit Rate (Based on AGI of $48,000) |
Tax Credit | ||
| Mike | $2,000 | x | .10% | = | $200 |
| Susan | $1,000 | x | .10% | = | $100 |
| Total Tax Credit Amount | $300 |
Tax credits are more valuable than tax deductions because credits provide a dollar-for-dollar reduction of your tax bill. However, the Saver’s Credit is a 'non-refundable' credit. That means it can reduce your tax bill to zero, but it can't provide you with a tax refund.
So, if Mike and Susan owed the IRS $350, their $300 credit would lower their obligation to $50. Be advised that there are limits on the amount of credit you can receive and other rules associated with this tax break. Read more about the Saver’s Credit on the IRS website and be sure to speak with your tax preparer to see if you qualify for this important benefit.
2013 Saver’s Credit Limits
| Credit Rate | Married Filing Jointly | Head of Household | All Other Filers* |
| 50% of your contribution | AGI not more than $35,500 | AGI not more than $26,625 | AGI not more than $17,750 |
| 20% of your contribution | $35,501 - $38,500 | $26,626 - $28,875 | $17,751 - $19,250 |
| 10% of your contribution | $38,501-$59,000 | $28,876 - $44,250 | $19,251 - $29,500 |
| 0% of your contribution | more than $59,000 | more than $44,250 | more than $29,500 |
*Single, married filing separately, or qualifying widow(er)
Statement & Newsletter Reminder
As a reminder, your 4th quarter statements are now available in Account Access. To view yours, logon to Account Access and click on the View Transaction History button in the left sidebar under the My Account tab. Your statements are displayed under the Statements and Confirms heading. If you’re having trouble logging on, you can personally reset your account information quickly and easily online.
Also remember to check out the 4th quarter Simply Put newsletter. The latest edition highlights the Missouri Target Date Funds – the default investment option in the deferred compensation plan – and how these custom investment options can simplify your retirement strategy.
Stay Connected with the Plan on Facebook, Twitter, LinkedIn and YouTube
You can find the State of Missouri Deferred Compensation Plan on Facebook, Twitter and YouTube. Whichever you prefer, staying connected with the Plan is a great way to receive timely plan news, valuable savings tips and more.