How Well Do You Know Your Pension?

Pensions are not as common as they used to be, which can lead to not fully understanding what you’re a part of, how it benefits you, and how to best take advantage of the benefits available to you. To further that understanding, let’s take a look at what the Arizona State Retirement System is, and what it isn’t.

For starters, the ASRS is what’s called a “Defined Benefit Plan.” In technical terms, it’s a 401(a) plan that is governed by Arizona statute and IRS rules. A more simple explanation:  it’s a mandatory-participation retirement plan that provides ASRS retirees with benefit payments for the rest of their life. The basic structure for retirement is as follows: ASRS members and employers both pay contributions to the ASRS, the ASRS in turn invests those contributions and pays members who meet retirement eligibility a lifetime benefit payment. That benefit amount can vary based on your age at retirement, years of service, and average monthly compensation. It’s not determined by your account balance with the ASRS or the performance of ASRS investments. 

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(Note: For a more comprehensive look at how your pension is calculated and how to potentially increase your pension before you retire, make sure to read the “The Affect of 'When' on Your Pension” article.)

When most people think of a retirement savings plan offered by an employer, they think of a 401(k) savings plan. Instead of being a “Defined Benefit Plan” like the ASRS benefit, a 401(k) is classified as a “Defined Contribution Plan.” It’s a subtle but important distinction, and they each operate very differently. For a 401(k) plan, the funds available to you when you’re ready to retire are solely based on your account balance and the performance of investments over the life of the account. Keep in mind that those investment decisions are managed by you, the employee, unlike investment decisions with your ASRS pension, which are professionally managed by the ASRS. There’s also no guarantee that the money in a 401(k) will last as long as a person may need it to. Once the balance of the account has been fully paid out, that’s the end of the benefit. According to the rules of your 401(a) ASRS benefit, your pension will be paid for your lifetime. In fact, it is quite typical for ASRS retirees to receive multiple times more in pension payments than what they actually paid into the ASRS over their career with contributions. This is made possible through the investing of member and employer contributions. Furthermore, Article 29 of the Arizona Constitution protects your ASRS benefit from being ‘diminished or impaired.’

That’s not to say a 401(k) isn’t a valuable savings tools – it’s just important to know the differences. The ASRS even actively suggests members have retirement savings outside of their pension, to help supplement their future retirement benefit. An ASRS pension is designed to be one of a three part strategy for retirement: your ASRS pension, Social Security, and personal savings. This is partially to help guard against future rising living costs. While your ASRS pension is guaranteed for your lifetime, it does not include any means of automatic increases, such as cost-of-living increases. This means you could expect your retirement benefit to be the same amount after you’ve been retired for 20 years as it was when you were retired for two years.

Curious to know how much your pension might be when you retire? It’s easy to find out. If you go to AzASRS.gov and select the Estimate Your Benefits page from the Members drop-down menu, you’ll find additional information on how your pension is calculated, including an interactive tool you can use to estimate an ASRS pension. For a more detailed estimate based on your actual salary, log into your secure MyASRS account at AzASRS.gov and view the Your Benefit Estimates section.

by Nathaniel Brengle, Communications & Sara Orozco, Strategic Planning

Published in Expanding Your Financial Horizons digital newsletter August 2019 

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