It’s Normal to Stress About This. We’ll Help You Bring Your Anxiety Down About 5 Notches
Will you have enough money in retirement? If you’re feeling a groan in your stomach, you’re a normal human. Let’s help you vaporize that feeling. Take a deep breath. Now just follow our step-by-step process below. It will take about 30-60 minutes and will help get you on a healthy retirement planning trajectory. We’re here to get you through this.
If you need to break up the steps and do them at different times, feel free.
Step #1: Understand Your Future Retirement Income
The first thing we’ll do is take a peek into the future. In retirement, you’ll need income to live off of to replace the income you were earning by working. Retirement income falls into 3 categories—pensions, Social Security, and savings:
Unless you continue to have a side job in retirement, the picture above represents all your income during retirement (receiving rent for property you own or selling off property like real estate during retirement can be considered part of withdrawing money from your investments for our purposes here).
The bottom line summarizes what financial planners tend to advise about your retirement savings—in order to maintain a similar standard of living to what you enjoyed prior to retirement, you will need to have an income that is at least 70%-80% of what you were bringing in while you were working. The reason it’s not 100% is because of the assumption that you’ll have less expenses when you’re no longer working—you won’t have to buy work clothes, or spend money commuting to work, and your expenses will likely decline a bit in general.
In the next steps, we’ll show you how to estimate your pension(s) and Social Security, and then we’ll show you how to adjust your savings/invesments now so that you can hit that 70%-80% target by the time you’re ready to retire. Have a pen and paper handy to make notes.
Step #2: Get a Pension Estimate
Get an ACERA Pension Retirement Allowance Estimate
When you become eligible and then retire from ACERA, you’ll receive a retirement allowance each month for the rest of your life. Amazing, right? But how much will you get?
The most efficient way to get an accurate estimate of your ACERA lifetime retirement allowance is to use the retirement calculator inside Web Member Services.
Once you’ve logged in, go to the Benefit Estimator and think of a scenario for a retirement that you think is plausible, like retiring at age 65. (You don’t have to be exact, and you can do as many of these estimates as you want later for other scenarios. We’re just going for a ballpark estimate here.)
Based on the scenario you’ve chosen, put in a projected date of separation (last day of work) and then a projected first day of retirement (at least the next day after your last day of work).
Hit submit, and then click the view button at the bottom to get a PDF Retirement Benefit Estimate. Look at the dollar amount in the Unmodified Option row in the Member Allowance column. This gives you an idea of what your retirement allowance might be in this scenario.
Alternatively, you can go to the Get a Ballpark Estimate page and click on the link for your ACERA tier to get a quick idea of what percentage of your highest salary you’ll get after retirement.
In general, you get a higher retirement allowance by working more years, earning a higher salary, and being older when you retire (although there are limits). In order to maximize your ACERA retirement allowance, it can help to learn more about how your ACERA Retirement Allowance is calculated and other details of your membership in ACERA. But for right now, finish out the rest of the steps, and you can come back to this information later.
Get Estimates of Other Pension Allowances You May Have
If you worked for other employers with pension plans (CalPERS, for example) that you expect to get pension allowance payments from when you retire, you should get estimates from those pension plans as well (their estimates aren’t included in your ACERA estimate, even if you have reciprocity). They may have online estimators like ACERA does, or you may need to give them a call and request estimates for the same dates as the estimates you got from ACERA.
Step #3: Get a Social Security Estimate
If you participate in Social Security (i.e., social security contributions are deducted from your paycheck), you will get to collect a monthly payment from Social Security when you become eligible. For an estimate of this monthly payment, visit the Social Security Estimator.
An important thing to remember with Social Security is you may not become eligible to start collecting Social Security until some time after you retire from ACERA. Depending on when you were born, you can begin to collect the full social security retirement ranging from ages 65 to 67.
Step #4: Calculate How Much to Save
Once you’ve determined the amounts you may receive from ACERA, Social Security, and any other pension plans, you can go ahead and total the first three lines. You now get an idea of whether they get you 70-80% of your pre-retirement income. If they don’t, you’ll probably want to save additional money before retirement. But how much? And where should you keep your money?
How Much to Save
Estimate how much to save by utilizing the many retirement calculators available online. The most useful ones allow you to include your ACERA pension. Each of these will give you slightly different answers, so try a few of them:
Prudential Retirement Calculator – If you’re with the County, First 5, the Courts, or AHS and you already have a 457(b) account, log in to your Prudential account and click the Get Started button.
These calculators should give you an idea of how much to save per month out of your paycheck to hit that target of adequate income replacement by the time you retire. Essentially, they’ll finish the equation for you. They’ll all give you slightly different numbers, so you could be conservative and just choose the highest savings amount, or you could take an average of them, or just save what you can for now.
Where to Consider Keeping Your Money
Keeping your money in financial instruments that can earn you interest (rather than in your secret hiding spot at your house) can help you beat inflation, and can also help your money increase through the power of compound interest.
When you put your money into a financial instrument, you’re loaning your money to companies and/or government agencies so they can enhance their businesses; if their endeavors go well, they’ll pay you an investment return, also know as interest, for the use of your money.
Here are a few options for places to keep and/or invest your savings:
457(b) Deferred Compensation Account
Through your employer’s deferred compensation program, you can put pre-tax money away into a professionally managed, interest-bearing 457(b) account that’s invested in mutual funds or other broad investments of your choosing. You choose what you want to invest in among a variety of options, so you choose the level of risk appropriate for you. The fees are quite low compared to investments you might find on your own because you’re gaining a financial advantage from pooling your money with thousands of other county employees. And you can even set it up through payroll deductions, so you don’t even have to think about it. Check out our page on Deferred Compensation for more information.
Any time you’re putting your money in investments that aren’t backed by the FDIC or by major government entities (such as Treasury Bills/Notes or government bonds) you’re increasing the amount of risk you’re exposing your money to—there’s a chance that if what you invest in loses money, your investments might lose value.
Mutual Funds and Exchange Traded Funds are moderate risk options that mitigate this risk by pooling your money with other investors and spreading it across a broad array of investments—the idea is that if one or a few individual stocks in companies lose money, the majority of the rest of the stocks won’t. You’re essentially abiding by the age-old advice of not putting all your eggs in one basket. For example, the Vanguard S&P 500 ETF invests in the 500 stocks that are part of the S&P 500 stock index, which is made up of many of the largest public companies in the world.
Just like putting your money in a 457(b) account as described above, there are a variety of other types of retirement savings accounts approved by the IRS. When you put your money in these accounts, you choose the types of investments that your money goes to, and therefore, you choose the amount of risk you are willing to take with your money. Many of these types of accounts will allow you to split your money among low and moderate risk options; for example, you could choose to put part of your money in FDIC-insured CDs, part of it in U.S. Treasury Bills, and part of it in Mutual Funds.
As a government employee who already has access to a 457(b) account, an IRA is the other type of retirement account in which you can save pre-tax dollars. If you’ve already maxed out your 457(b) account for the year, you can put additional money in an IRA, although there are a few rules and restrictions.
Be very wary of investing in individual stocks! This is a high-risk way of investing and even professional investment managers with decades of experience have mixed results picking the right individual stocks!
You Are Responsible For Your Own Risk
ACERA is providing the information above to educate you on the some of various retirement savings options, but ultimately you are responsible for any risk you take with your money.
Once you have a ballpark estimate of how much additional money to save from your paycheck, the easiest way of helping you stick with your savings plan is by setting up a payroll deduction or an automatic transfer.
Payroll Deduction: When you open a deferred compensation account like a 457(b), a Deferred Comp representative will set up an automatic payroll deduction for you, which means money will automatically be taken out of your paycheck and transferred to your deferred comp account. At first you’ll notice a bite taken out of your paycheck, but after a few paychecks your new take home pay will be the new normal—you’ll adjust your spending and you’ll be well on your way to a healthy retirement savings.
Automatic Transfer: Many banks and investment managers will help you set up a periodic automatic transfer from your checking account to your savings and other investment accounts. You can even set it up so that it happens on payday so you won’t even see the money in your checking account because it will just go straight into your savings and investments.
Check Your Trajectory Periodically
Just check in periodically and redo the steps above maybe every 6 months or every year to make sure you’re still on the right trajectory. None of the calculators will ever give you the exact retirement savings amount you need to target; what they will do it get you pointed in the right direction. Just do them again each year and then re-adjust your trajectory.
Nice job. Now that you’ve projected how much additional to save for retirement and have created a payroll deduction to your deferred comp account and/or set up an auto transfer to your savings/investments accounts, you don’t need to do anything else for now. Anxiety crisis averted. Just remember to do step 5 and check back periodically to adjust your retirement savings trajectory.
Extra Credit: Learning More About Your Retirement
Understand What Factors Make Up Your ACERA Retirement
Depending on your situation, it could be especially important to consider purchasing service credit if you have time that is eligible for purchase, such as part time work, TAP time, or unpaid leave time. Purchasing service credit increases your retirement allowance. The longer you wait to purchase service credit, the more expensive it gets, due to interest accruals, so act soon.
Consider Additional ACERA Benefits
You may be eligible for additional retirement benefits such as healthcare. When you retire, you will have the opportunity to enroll in healthcare coverage through ACERA, and if you have at least 10 years of ACERA service credit, you will be eligible to receive subsidies that help you pay for the cost of being enrolled in these healthcare plans. When you’re approaching retirement, it’s a good idea to understand the healthcare costs (including vision and dental plans) and subsidy amounts so you can understand how much of your retirement income needs to budgeted for healthcare costs. This is especially true if you plan to retire under age 65, when Medicare eligibility starts, because healthcare costs are generally higher for people not yet Medicare-eligible.
To find out more about other ACERA benefits to consider in your retirement planning such as medical, dental, vision, and death, visit our page on Other Benefits.
Also, check out the healthcare costs (pages 27-29) in our Retiree Enrollment Guide to see what the cost and subsidy amount are for this year.
Get Financial Assistance From Prudential
If you enroll in the your employer’s deferred compensation program, you get free access to licensed financial guidance professionals. They function as record keeper and are responsible for processing all participant transactions. Check out our page on Deferred Compensation for more information.
Get Financial Assistance From 1st United Services Credit Union
1st United Services Credit Union was created by county employees, for county employees. If you open an account with them, you can access their free licensed financial advisors to help you set a course for additional retirement savings. They also offer a web app called 1st Money Manager, where you can connect data from all of your financial accounts to help you see your overall financial picture. Visit 1st United Services Credit Union.
Read a Few Additional Articles on Retirement Planning
People use the term “deferred compensation” when talking about certain types of retirement savings accounts because when you have money taken out of your paycheck to put in one of these accounts, you are effectively deferring the compensation you would have received today while you work until later, usually saving it for when you retire.
Usually the money is take out before taxes, which means that saving for retirement lowers your tax liability, which is the amount of your income that you pay income taxes on. You pay less taxes now.