Retirement planning can feel like one of those “not now, later” things. It can feel overwhelming when you don’t understand your different options, and you don’t know where to turn, or who to trust, to get the education you need.
But retirement planning is actually essential to your longevity, and the earlier you start, the better off you will be.
There is no other area of your life where planning ahead can actually dramatically improve your life later.
Retirement planning can make the difference between barely making it and making it big.
For state employees, it can be even more critical to get on top of your retirement planning as early as possible because you may be leaving money on the table, money that should go into your pocket later.
What Is Retirement Planning?
Before we go any further, let’s make sure you understand what we’re even talking about when we say, “retirement planning.”
Retirement planning is preparing for the days in the future, tomorrow or 50 years from now, when you will no longer be earning an income from going to work. Your paycheck is a thing of the past, and now you must rely on Social Security and any other savings you may have established during your working days.
Social Security Won’t Cut It
While most people pay a portion of their paychecks into the federal Social Security system automatically their whole lives, the payout you receive upon retirement, at the age of 65 or older, is simply not enough to live well, and barely enough to live, each month.
The average American collects $1,555 each month, which means some receive far less and some receive more.
With the average cost of living for an individual currently at $3,189, Social Security falls far short of that mark.
Even if your house is paid off, you still don’t want to scrape by on Social Security benefits each month.
Retirement is supposed to begin your golden years.
You must make those years golden by getting on top of your retirement planning today.
How Does the Public Employee Pension System Work in Maryland?
The good news is, as a Maryland state employee, you have access to your pension as well, on top of your social security benefits.
That means that full-time and part-time employees in Maryland, working a minimum of 500 hours per year, participate in the Maryland State Retirement and Pension System. It requires a mandatory contribution of your income for all employees enrolled. Your specific city, county, or state will then contribute an additional amount, depending on your specific pension program.
You are fully vested, meaning you will receive full retirement benefits, calculated based on your weekly hours and your time spent working for the state after you have been employed full time by the State of Maryland for at least 10 years of service.
You can also retire early, at the age of 60, after 15 years of service, and receive your full pension.
It might be a good idea to wait until 65, however, as you will be contributing more to both your pension and your social security, which means you can collect more, for longer.
Tax Benefits of a Pension
An additional benefit to retiring with the State of Maryland is that your pension will not be taxed up to the first $30,000. Maryland also does not tax your social security benefits.
So, if you collect both a pension and social security, which is your right, then you may get quite close to that average cost of living amount above, all tax-free.
How Does Social Security Factor into State Employee Retirement Plans?
At this point in time, nearly all state and local government employees have social security withheld from their checks.
This means that you will be eligible to collect both social security and your pension upon retirement, age 65 or older.
There is nothing that precludes you from collecting both, and as we noted above, you are going to want at least those two incomes to support your retirement lifestyle.
The only difference between the two, social security vs public pension systems, is that you do not have to qualify to receive social security. It is automatically deducted from virtually every paycheck you get from the time you start working, and your lifetime contribution to the system, along with your age of retirement, determines your payout.
With a pension, your payout is determined by a formula created by your specific employer.
Local governments, cities, and counties, as well as the Maryland state government, all have their own calculations.
You can view your specific benefits along with a calculator at the state of Maryland pension website here.
Different Types of Retirement Plans for State Employees
Depending on your specific system, you may have either a pension or a 401k. The difference between a pension and a 401k is that one is public, and one is private.
In an employee pension plan, your contribution is typically set, your employer’s contribution is set, and your payout is set.
With a 401k, you can increase or decrease your contribution, your employer typically will match your contribution up to a certain amount, and your payout is determined by those two factors, how much you contribute, how much they contribute, and the length of time both contribute, as well as the performance of your mutual funds or index funds.
In contrast, a pension commits to paying out a set amount for the duration of your retirement, no matter the market performance.
There is a level of predictability, stability, and relative safety with employee pensions versus 401k plans which can be more volatile.
Which Maryland State Retirement Plan is Right for Me?
While it is a great question, it is not always up to you.
Typically, and this seems to be the case for most Maryland State employees, your employer decides which retirement plan you have.
You will have social security no matter what, and your employer will determine whether employees get a pension, which is automatic, most employees cannot opt-out, or a 401k, which you can choose to contribute to or not.
If you have a choice, a pension is the safest way to go because your employer makes a commitment to pay you out to matter what.
A 401k can go up or down, which allows for more volatility and less safety in terms of retirement. Especially if you are close to retirement age, you will want to opt for a pension.
If you are years away from retirement, like 20 or more, and you have the option, you may want to opt for a 401k and max it out.
The benefit of a 401k plan is you typically have more say in where your money goes. You get to pick and choose your mutual funds, index funds, and work with a money manager.
Your money manager will likely advise you to be a little more risk-tolerant if you are younger and have more time until retirement because you can invest in funds that will likely earn you more in the long run.
If you are closer to retirement, you will want to be a bit more risk-averse, as you won’t be able to wait patiently while an underperforming stock bounces back.
The Benefits of a Good Retirement Plan
In the end, it may be beneficial to work with a licensed agent to fully explore all of your options.
Even if you have both social security and a pension, or social security and a 401k, you may want to also contribute to an IRA of some sort.
The benefits of a good retirement plan cannot be emphasized enough.
And unfortunately, you often don’t realize it until it is too late.
Max out your options as much as you can, and work with someone trusted to ensure you understand the type of lifestyle you hope to have upon retirement and how best to make sure you can fund that lifestyle.
Get in touch with an agent in the My State Pension network today.