Retirement/401k question

[trueknight]

Here's the situation:

I work for the State of Texas - been here since 1992. We have 6% of our salary taken out to the Employees Retirement System (ERS), and the State matches that with 6.45%.

I hear the horror stories of people not putting enough away to retire comfortably and the concerns with Social Security.

This past January I was on the ERS website and saw that we can also have a 401k. The State started it effective January 2009 making it mandatory 1% for new employees, but current employees could get online and enroll. So, in a nutshell I signed up with just having 1% taken out and now I've raised it to 2% of my monthly salary.

I've been seeing that the consensus is to save 15%ish at least.
With my pension and match that equals 12.45%. Does this mean I should make my 401k deductions equal around 3-4%????

That would bring me to 16%. Does my line of thinking make any sense?? I'm just worried it's not enough - and btw no there is no match on the 401k.

[Merch]

I would look at a Roth IRA, if your are eligible, before putting money into a non-matching 401(k).

I save 15% of my gross regardless of matching. So in your case, if I was putting 6% in the ERS, I would put 9% in the 401(k) or Roth IRA.

Hope that helps.

[disneysteve]

I agree with Merch. A Roth is probably the better choice. More investment options. Probably lower expenses. Better withdrawal rules down the line.

I also agree with investing 15% of your gross income aside from any match. If you can't swing that now, do the most you are comfortable with and try to increase by 1% every year until you are up to at least 15%. The best time to increase is when you get a raise. That way you don't notice a change in take home.

[MonkeyMama]

Originally Posted by trueknight

Here's the situation:

I work for the State of Texas - been here since 1992. We have 6% of our salary taken out to the Employees Retirement System (ERS), and the State matches that with 6.45%.

I've been seeing that the consensus is to save 15%ish at least.
With my pension and match that equals 12.45%. Does this mean I should make my 401k deductions equal around 3-4%????

That would bring me to 16%. Does my line of thinking make any sense?? I'm just worried it's not enough - and btw no there is no match on the 401k.

I think your line of thinking makes sense on some level. I double checked though and Texas ERS is a defined benefit plan. For that reason I wouldn't consider it as part of the 15%. I'd rely on it about as much as social security. (& yeah - it sounds about the same as social security). The younger you are, the less I would count on any pension system.

(If you had a large "defined contribution" match from an employer, that would be a different story. Then it's in your name, it belongs to you, and you can take it if you quit, etc.).

I'd go for an IRA too - assuming you are young and in a low tax bracket - I'd agree the ROTH makes more sense. I'd aim to max out your IRA ($5k per year).

[disneysteve]

I wanted to explain the reasoning behind saving 15% aside from any match: it gets you in the habit of living on less. If you save 15%, that means you are only living on 85%. If you only save 9% plus a 6% match, that means you are living on 91%. When retirement rolls around, you will have a higher income and lifestyle to replace. Much easier to replace 85% than 91%.

[trueknight]

Thanks for the good advice -

I think I'll just stick with the 401k offered by the State and slowly raise my contributions until I hit 15%. I plan on raising it 1% every three months until I hit the 15.

I understand the concerns about defined benefit plans what with SS might not even existing by the time I'm eligible, but I would be very, very suprised if the State of Texas went into the tank!!! Maybe if I worked for the State of California I would agree more on that topic.

I'm 38 and will retire from the State @ age 50 with 30 years of service. Sooo I have 12 years to go until I start a new career/new life!!

They also offer another thing other than the 401k - i think it's a 457?? I think the only difference was with one you contribute a percentage and the other a dollar amount.

[trueknight]

I need to add another thing:

Our legislature is currently in session and a saw a piece of legislation where the State will match the 401k contributions. Looks like there is a good chance of it getting passed so it may behoove me to stay put with the 401k and concentrate on increasing my contributions when possible.

[Runaway Finances]

Boy there is a lot to cover here....first, the 457 is a "deferred compensation plan", normally I do not recommend them because legally the money you put into that plan is part of the general assets of the state. Now, we're in big trouble if the state of Texas goes bankrupt, so this isn't a huge issue.

Every post I have read on this site seems to zero in on a 15% number. There really isn't anything magical about that amount. The answer depends on your goals (ie. when do you plan on retiring, how much do you need, rate of return assumptions, the dollar amount you are contributing, etc.). I don't want to knock contributing 15% but that doesn't necessarily mean you will meet your goals.

As for the one comment about thinking of the state's defined benefit plan like you do Social Security, I think that is comparing apples to oranges. The state of Texas doesn't have debt the last time I looked, and I would guess that plan is almost fully funded. You should be able to get that information by logging into your account or requesting it from the plan's administrator. A new law requires them to send out the funding status every year.

A ROTH is good, but the higher the tax bracket the better a 401K or deductible IRA is. The lower the bracket the better the ROTH is. The laws now allow 401K's to offer a ROTH election, so inquire about that too.

You don't mention your savings outside of retirement either. Make sure you have savings outside of retirement plans. Try to work up to 6 months of living expenses.

[disneysteve]

Originally Posted by Runaway Finances

the higher the tax bracket the better a 401K or deductible IRA is.

If you earn enough to be in a higher tax bracket, you earn too much for a deductible IRA. The income limit for a traditional IRA is 105K if filing jointly.

[Runaway Finances]

That's true IF you are an "active participant" in a qualified retirement plan, which this person is, but I wasn't sure if he was married. If one spouse is an active participant and the other is not, then the one who is not can contribute to a deductible IRA regardless of income, assuming I remember the rules right. I quit trying to keep up with those rules!! It's hard to give great advice when we don't know all the facts!!!