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Why Do I Need Savings If I Have a Pension?

By Rosie Tomforde, Audit Officer

The Social Security Administration (SSA) states that to adequately prepare for your future financial needs, your retirement portfolio should include three components:

    • Benefits from pensions
    • Personal savings & investments
    • Social security benefits

By its very design, as defined in A.R.S. §38-712(A)(5), the ASRS is provides a base benefit that is less than 100% of a member’s post-retirement income needs. Personal savings and Social Security are needed to round out the member's retirement planning.

ASRS retirees are fortunate to have both a pension and social security benefits. Some expenses will naturally drop off in retirement, such as commuting to work and lunches out. And, you’ll no longer be contributing to Social Security, Medicare or the ASRS. That leaves some non-retirees wondering if we really need savings as well?

According to the SSA, the average retiree will need approximately 70% of their pre-retirement income. Social security benefits provide about 40% of an average beneficiary’s pre-retirement income (that number is lower for higher-income earners). An ASRS retiree with 20 years of service credit receives 43% of the highest three years of income in the last ten years, but a retiree with only ten years of service would receive 21%. Check out the ASRS Benefit Estimator to get a better idea of your anticipated benefit.

Those two income sources provide a solid start, but there are a few other things to consider.

Debt. Are you taking pre-existing debt with you into your retirement, such as a mortgage, credit card balances, car or student loans?

Inflation. Expect living expenses to go up for things like food, rent, HOA fees, transportation, clothing, utilities, and insurance while your income remains relatively flat.

Healthcare. According to AARP, a 65 year old couple retiring this year will need $240,000 to cover future medical costs (not including the possibility of any needed long-term care). Those kinds of expenses will quickly eat a hole in your post-retirement budget! And, if you've retired before you are Medicare-eligible, you can expect to carry more of your healthcare expenses than will be covered by traditional health insurance.

Important questions to ask yourself:

    • How do you decide whether 70% will be right for you?
    • What do you anticipate your retirement will look like?
    • Should you aim higher, or will you be comfortable with a little lower standard of living?

So, will you need savings as well as social security and a pension? Experts say, yes!

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