Originally printed June 2006 Newsletter
Now that the contract is settled, everyone will be getting a raise. Some will be bigger than others, but all will be getting an increase.
This may be a good time to reassess your financial plan. Over the past couple of years, you have been forced to deal with rising prices while living on a fixed income, but you had hope that eventually a pay raise would come, or you could get a part time job to earn more money. You probably also have some discretionary expenses that could be cut if necessary. Now fast forward to retirement. Your income will probably be fixed, based on your state pension. You can anticipate annual increases, but they aren’t guaranteed. Your health may also deteriorate to the point that you won’t be able to work a part time job to supplement the pension. You may also have expenses that aren’t discretionary, like medicine and health insurance premiums. As the population continues to age, these expenses will continue to take a significant chunk of an elderly person’s income. But what if you aren’t even 30 yet? Why should you be concerned, and what can you do?
It takes years to build wealth, but it starts with regular saving. If you haven’t done so yet, contact ETF here to inquire about setting up a deferred compensation account. Your contributions to that account are pre-tax dollars, so it will reduce your taxable income today, while establishing a safety net for the future.
If you are eligible, set up a ROTH IRA. Starting in 2019, the limit of contributions is $6,000 each year for each wage earner, so you and your spouse could each contribute $6,000.
There are advantages and disadvantages between each account. The ROTH IRA contributions have to be left in at least five years, but they can be withdrawn to buy a first home for you, your spouse (just in case your former spouse now owns your former home) or children, and they can be used to pay for educational expenses without a penalty. The deferred compensation contributions are taxed when they are received, but you would presumably be in a lower tax bracket when you receive them. Other than the exceptions like buying a home or educational expenses, you can’t make ordinary withdrawals from your IRA prior to age 59 ½ without a penalty, while deferred compensation accounts are accessible once you sever service with your employer. If you retire from a protected position at age 53, that could be a big issue.
As employees who work for the government, most of us will never be considered rich. Our jobs offer some security, and one tradeoff is that we don’t get increases that match the private sector. I personally view a retired person complaining about their high tax bracket in the same manner as a person complaining about their golf game. It is human nature to complain, but all things are relative. In my excursions to the links, I don’t recall seeing many homeless people playing golf, and I don’t see cancer or cardiac patients roaming the course either. With some of the issues that face society, if the biggest aggravation a person has is an unpredictable slice or a propensity to four putt, their life seems pretty good to me. If a retiree is actually in a high tax bracket, it also means they probably aren’t trying to decide whether to pay the heat, rent or buy medicine. Many retirees would gladly trade places to be in that high tax bracket.
If you have small children and are starting to save for their college education, I have some simple advice. DON’T! That can be qualified by saying that you can save for them, but only after putting away the maximum contributions in all retirement vehicles that you have available to you. Right now, that is $15,000 per year in your deferred compensation, $6,000 each for your and your spouse in IRA’s, plus whatever your spouse can put into a qualified retirement savings plan at work. To quote Financial Guru Clark Howard, “There are plenty of scholarships to pay for college. There are none to pay for retirement.”
The following paragraph was taken from Clark Howard’s website, regarding the lack of savings in our country. We do have the state retirement system to help offset these numbers, but would you rather spend your golden years in comfort, or as a greeter at Walmart?
Nov 15, 2005 -- Half of baby boomers not ready to retire
A new study published in the Boston Globe shows that more than half of baby boomers are going to have to work past retirement age. By their own admission, these people don’t have enough money saved to be able to retire. Not to mention the fact that many people think they have more than they really do. About 30 percent of people have saved enough to last them about two years after retirement. And one in seven people have no money saved at all. About the same number have enough to live comfortably. So, it’s a big bell curve. Those born in the 40s, may not be able to get out of this working cycle. But if you were born in the 60s, you still have time to reverse this trend.
Another fact that I discovered when my oldest daughter went to college was that retirement assets aren’t considered when calculating financial aid eligibility. Other assets are. A parent is expected to contribute 5.6% of their non-retirement assets towards their child’s education each year, and the child is expected to contribute 35% of their assets. If you are putting your savings into a UGMA/UTMA educational savings account, that account must be used for the child’s education. Put the money in a location that gives you more options. Having a rainy day fund is important, but the system is designed to encourage saving for retirement. Use the system to your advantage.
This article is not intended to offer complex solutions for affluent investors. There are many websites and companies that provide education on retirement contributions and educational financial aid preparation. They all have one suggestion in common, and that is to start today if you haven’t already. I know the cliché it overused, but we don’t plan to fail, we fail to plan. God willing, we will all reach retirement age eventually. Time can be your ally or enemy in wealth building. Start today and make it your ally.
RETIREMENT FINANCES 102
Reprinted and refreshed from the August 2006 Newsletter
With the contract settlement, we receive additional vacation time beginning in 2005. The current contract has a memo of understanding that allows all eligible employees to bank 16 additional hours of sabbatical this year, rather than the standard 40 or 80 hours that eligible employees can bank anyway.
Some employees prefer taking their vacation in the year that it is earned. You may be one of those employees, but the question is, “Which is the best option for my long term planning?”
The first question is whether or not you are eligible to bank sabbatical leave. 12/6/5 of the contract states:
12/6/5 Employees that earn less than one hundred eighty four (184) hours annual leave each year and who have accumulated a minimum of five hundred twenty (520) hours of sick leave may, at the employee’s option, elect to receive forty (40) hours or portion thereof of annual leave under one of the following options each year:
A. Annual leave during the year earned;
B. As credit for termination leave or as accumulated sabbatical leave.
Those employees who have accumulated the five hundred twenty (520) hours of sick leave on July 1, 1992, and those employees who accumulate such hours of sick leave after that date, will be permanently eligible for this benefit.
If you are conservative about using sick leave, you may be eligible after roughly 4-5 years of employment. After five years, you will be earning 18 days of vacation per year, in addition to 9 legal holidays and 4.5 personal holidays. That comes out to 31.5 days per year away from the job, more than 12% of your total workdays.
The employer recognizes that we, the employees, need to take leave time in order to recharge. If they didn’t feel that way, we would be able to bank all of our time off. We are limited to 40 hours per year up to year 25, and up to 80 hours after that, but a 25-year employee earns 27 days of vacation per year, plus the other personal and legal holiday leave time.
To illustrate the difference sabbatical can make, I will use an example of an actual employee to show the benefit of banking sabbatical. This employee is a law enforcement officer, and plans to retire in 9 years. He already has 9 weeks in sabbatical, and will be banking 40 hours per year until his 25th year, at which time he will begin banking 80 hours. He estimates he will have approximately 20 weeks of sabbatical when he is ready to retire.
If he would have used that time over his career, he would definitely had more time off (duh), but he wouldn’t have seen any difference in his paychecks over that time span. However, by converting it to sabbatical, he will actually be able to stop working the winter before he turns 53 without taking a penalty.
The minimum age for retirement is set by Chapter 40.02(42), Wis. Stats. That age is 54 for protective employees with less than 25 years of service, and 53 for employees with 25 or more years of service. Non-protective employees have a standard retirement age of 65. Chapter 40.23(2)(f) sets the reduction for early retirement at 0.4% per month for every month prior to the normal retirement age. That amounts to a 4.8% reduction for each year of early retirement.
Active employees (including those on extended vacation) also get the majority of their insurance premiums paid by the employer. Retirees pay 100% of their premiums, either through health insurance conversion credits (HICC) from accumulated sick leave or actual reductions in their annuity to offset the premium rate.
Active employees also continue to earn vacation and sick leave hours while they are on the books, and are eligible for any legal holiday that occur during their sabbatical leave time.
By using accumulated sabbatical leave rather than simply retiring early, in this case 20 weeks or 38.5% of a year, this employee will raise his actual pension formula by an additional .77%, or roughly 1.25% more than the original formula, and prevent a reduction of the pension of 1.85%. That translates to a roughly 5% actual increase in pension compared to the same date without the sabbatical extension. During those twenty weeks, the employee also earns 10 ADDITIONAL vacation days, and 55 additional hours of sick leave, which is most likely all subject to doubling. Using a projected salary of $30 per hour (I realize no one in this unit makes $30 per hour yet, but this projection will include a salary 20-40% higher than your current salary), The additional vacation earned while using the sabbatical is worth $2400, and the additional HICC is worth $3300.
While this employee remains an active employee, the current health insurance contribution by the employer of roughly $1750 per month for five months is $8750 more that the employee receives, for a total benefit of more than $12,000 for banking those 20 weeks. With the HICC conversation amount added to those 5 months of paid premiums, you will be 8 months closer to Medicare age without spending a penny of your pension or savings. The banked sabbatical, over time, averaged out to a roughly $600 per week dividend, and you still get paid for it. The $12,000 is just the interest earned.
Sabbatical leave can also be converted in HICC, but it does not receive the doubling factor that sick leave does. If you are already older than the minimum retirement age without penalty, or if you have maxed your pension at 65% (you have more than 32 years of service) or 70% for non-protective classifications (43 years of service), this may be an option to consider as well, since health insurance premiums continue to rise faster than inflation. Either way, saving for retirement is always a good practice.
Delaying the use of vacation parlays it into a comfortable start to the next chapter in your life. The choice is yours to make, but like so many investments, time and planning are what turns small investments into big returns. Understand the benefits, and make the choice that best fits your unique situation.