The Growing Public Sector Pension Gap
Description
Gone are the days when a public sector pension guaranteed a comfortable lifetime retirement. Like their private sector counterparts, today’s public employees need to plan and save.
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With pensions eroding, public employees need to do more to save. What options are best for you?
Stories abound about the fireman who retires at age 45 with a six-figure pension, or the city manager who leaves after just five years’ service with full salary and health coverage for life.
What doesn’t make headlines, however, is the growing number of public sector employees who have seen their retirement benefits erode in the face of budget cutbacks and mounting public deficits. States and cities across the country are taking steps to reduce pension costs by whittling away employees’ retirement entitlements. Even San Francisco, bastion of liberal handouts, recently saw voters approve a plan to scale back retirement benefits for city employees.
Although traditional pensions still dominate at all levels of state and local government, hybrid plans are emerging that combine a 401(k)-type component with a guaranteed benefit. In fact, 11 states — including Alaska, Michigan, Colorado, Florida, and Ohio, plus Washington, D.C. — now have primary retirement plans that include some defined contribution component.1
The upshot for public sector employees is that, increasingly, they are likely to need to augment their pensions with salary contributions to employer-sponsored plans or save on their own if they want to maintain their preretirement lifestyle. And since many states have “double dipping” laws in place that prevent public employees from collecting both Social Security and a state pension, the need to set aside their own funds for retirement is even more important.
How to Compensate
Several tax-advantaged retirement savings options exist that may be accessible to public sector employees. The most popular include:
- 403(b) plans are generally available to employees of qualified public organizations such as schools, hospitals, and certain nonprofit employers. Similar to 401(k) plans, 403(b) plans allow employees to contribute a portion of their salary on a pre-tax basis; and no tax is paid on contributions or earnings until it is withdrawn in retirement.2
- 457 plans are available to state and local government employees and are somewhat similar to 403(b) plans. There is no penalty for early distributions from a 457 plan (however, taxes are due), although you generally cannot take in-service distributions unless you have an unforeseen emergency.
- IRAs are available to both public and private sector employees. Like 403(b) and 457 plans, IRAs also offer tax-deductible contributions and tax deferral. However, IRAs have lower annual contribution limits and eligibility for favorable tax treatment may be subject to certain income limits.2
To find more information on these or other tax-advantaged retirement savings plans, see Publication 590 at http://www.irs.gov/.
Source/Disclaimer:
1Source: Journal of Pension Economics and Finance, “Behavioral Economics Perspectives on Public Sector Pension Plans,” April 2011.
2Withdrawals from 403(b) plans and IRAs prior to age 59½ may also be subject to a 10% early withdrawal penalty, in addition to ordinary tax on withdrawn amounts.
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January 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP® , a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
Digital Estate Planning
Many people read articles discussing the importance of protecting and safekeeping passwords, and recognize that if they are not careful, their online accounts and other activities may be compromised, leading to disastrous results. It is possible, however, that you may protect these same passwords so well that in a period of incapacity or upon your death, your agent or executor will not have access to your online accounts.
Digital estate planning is a relatively new concept in traditional estate planning that takes online activity into account when designing your plan. Digital estate planning not only tries to ensure that your agent or executor has access to your online accounts, but it also takes into account the plethora of other electronic assets that the average American now has.
To illustrate the importance of completing digital estate planning, I’ll use the example of Scott, a 40 year old single man who, like many people, has a large online presence. Scott does all of his banking online and never receives a bank statement in the mail. He has an investment account at a company that does not have a brick-and-mortar location. Scott pays his bills electronically, without receiving a hardcopy bill, and he pays some of his bills automatically on a monthly basis. He has several e-mail accounts and maintains his own website and blog. Scott buys and sells items online through Amazon and eBay, using his PayPal account to complete the transactions. He has an extensive photo and music collection that he stores online, and he is an active Facebook and Twitter user. Finally, because Scott prefers to not have papers lying around his house, he stores copies of all of his medical, financial, tax, and legal documents on a “cloud” server.
Now imagine that Scott becomes incapacitated or dies. How would Scott’s agent or executor begin to handle his affairs? How would this agent or executor have any idea of the true extent of his or her responsibilities? Digital estate planning attempts to prevent these problems from occurring.
One of the first things that digital estate planning involves is taking inventory of your online presence. In addition those mentioned for Scott, other examples of your online presence (also referred to as “digital assets” or “electronic assets”) include:
– Website domain name ownership;
– Music playlists;
– Online videos, stored on sites like YouTube; and
– Online magazine, newspaper, and website subscriptions.
After taking an inventory, the next step is ensuring that your agent or executor is aware of and is able to handle each of the items. You should also consider storing this information on a CD or flash drive that can be kept with your estate planning documents. Your agent or executor will likely need access to your personal computer, tablet, and/or smart phone, so make sure that you provide instructions for how to access these devices.
You may also want to include language in your power of attorney or will that allows your agent or executor to handle your digital assets. It is important to note, though, that each online provider typically has a service agreement that may limit the ability of another individual (such as your agent or executor) to access your online information. Some service agreements may actually state that you do not, in fact, own your electronic assets.
There is not much established law in the field of digital estate planning, but in the coming years, we will surely see this area of law evolve. Although Virginia has not done so, other states have begun to address the issues involved with digital estate planning by passing laws that provide executors with access to digital assets, and authorizing an executor to take control of a deceased individual’s online presence. As we all move towards a more digital world, the importance of digital estate planning will only grow.
The lawyers of The Estate Planning & Elder Law Firm are available to help you with your traditional estate planning and your digital estate planning. The attorneys at The Estate Planning & Elder Law Firm can also assist clients with their estate, financial, insurance, long-term care, veterans’ benefits, and special needs planning issues.
Call Ariba Asset Management at 1-800-808-7488 for a review of your financial planning needs and for a portfolio review.
Gifting: A Win-Win Proposition
Description
Read this article to learn how you can make annual gifts of up to $13,000 ($26,000 per married couple) to as many people as you wish without incurring federal gift taxes.
Did you know that there’s a wealth-transfer technique you can use to reduce your taxable estate and keep more of your assets for your heirs? You can make annual gifts of up to $13,000 ($26,000 per married couple) to as many people as you wish without incurring federal gift taxes.
An example: A married couple with three children could reduce their estate by $78,000 each year if $26,000 were given to each of their children.
Gifting can be used in a number of unique ways. You can use annual gifts to help build a college fund for a child, grandchild, relative, or even a friend — by contributing to a 529 plan account, a Coverdell Education Savings Account, or a UGMA/UGTA account. In fact, 529 plans have special rules that allow you to make five years’ worth of contributions in one year without incurring any gift taxes — that’s $65,000 for individuals and $130,000 for married couples.
Gifts can also be used to build wealth for future generations as well as help a child, relative, or friend fund a down payment on a home, buy a car, or start a business. Your financial advisor can help you determine how annual gifts might fit into your overall financial plan.
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January 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
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