How To Save Beyond Your Texas Pension?
In Texas, various pensions are offered, from ERS, which covers state government employees, to TRS, which covers educators. These pension systems are generally well funded and are the bedrock of many retirement plans and your Social Security (assuming you pay into this system). But what is available beyond your pension for state workers, and should I be contributing to these retirement programs?
There are essentially two types of so-called Optional Retirement Plans (ORP) offered to most state workers and educators. The first one is the 403(b) plan (educators) or a 401(k) plan (Texas State workers). These plans are very similar to what is offered in the private sector. But as mentioned in many of my previous blog posts, some plans have had very high fees and sometimes too many choices with teachers, and a lack of choice with state workers and higher educators.
Unfortunately, you cannot find Vanguard as a low-cost option for educators and state workers in Texas. This might partly be explained because government-provided defined contribution plans are generally not governed by the 1974 ERISA Act as 401(k) plans are in the private sector. So you tend to get higher-cost options. In addition, ERISA enables the employee to sue the employer if the plan does not work in their best interests and has low-cost investment options, which are not available for state workers.
Overall, many ORP plans are generally good in Texas but are challenging to navigate the investment choices. The state HR systems are often too close with the vendors that can recommend high-priced variable and fixed annuity options. It is always good to get a second opinion on your investment than what is sold to you by the brokerage by an independent financial planner.
The second option, which I believe is unique and better if you have a pension, is the 457 plan. This 457 plan lets you take money out if you separate from service without a 10% early withdrawal penalty if under age 59.5. If given a choice of a 403(b) or 457 plan, I generally prefer the 457 since it gives you more flexibility if you want to retire early or change careers. The plan is offered, and the state level with Texa$aver and the University of Texas System provides UTSaver. Other higher education systems also provide variants of these programs, so check with your HR.
Another exciting rule with a 457 plan is that you can max out a 401(k) and 457 plan which is $20,500 for each account in 2022. The aggregate limit across 401(k) plans does not apply to a separate 457 plan. But the drawback is that there is typically no match from your employer in these plans. View these as an essential supplement to your pension to help with your retirement savings.
Another option is to save in a Roth IRA. You could do this in addition to keeping in an ORP plan. The benefits of a Roth are that the money grows tax-free, and you get tax-free distributions when withdrawing the money in retirement at age 59.5. In addition, the benefits of a Roth IRA are that you can pick virtually any brokerage that you want and are not restricted by your employer selection. I often recommend low-cost index funds, which can be easily found. You can choose Vanguard as a brokerage for your Roth IRA.
The main message is that a pension from the state can be a good starting point, but it is wise to save beyond the pension in the 457 plan and or Roth IRA. A pension is a good start, but you should seriously consider saving beyond retirement in an ORP. The State of Texas offers many good different plans from lower-cost brokerages such as Fidelity and TIAA. But navigating the choices of investments can be daunting. Reach out to me below, and we can look at what your employer offers and maximize your retirement savings.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. In addition, individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
