This past month, I spoke with Anne Kates Smith of Kiplinger Magazine on how those in public pensions should react to the the ongoing news regarding the Bankruptcy of the City of Detroit. She posed the question, what should pension participants expect? Before addressing this concern, I would first start by cautioning everyone to put the Detroit crisis in perspective. Municipal and Government bankruptcies are rare, and though they do happen from time to time, focusing on the outlier makes us believe this is more common than it really is. This is a common mental bias we should be aware of. This is why I always remind clients, focus most of your energy on what you can control because it will have the biggest impact on your future.
Given there is some risk, how should you respond? I answered:
"Relying solely on your employer is never a good move," [...]
If you can contribute to a supplemental savings plan, such as a 403(b) or 457(b), do so. [...] If you're not offered a savings plan outside a traditional pension, set up your own individual retirement account—even if you don't qualify for tax-deductible contributions. Kuebler tells clients to aim for savings equal to 15% of income, which means that if the state requires you to contribute, say, 8% toward a pension, you should sock away another 7% elsewhere.
Your actual rate of savings may vary based on your own goals and resources, but each employee needs to take some responsibility towards their own retirement. The State University Retirement System (SURS) for Illinois University Employees and the Teachers' Retirement System (TRS) for public school teachers are a great component of a retirement plan, but needs to be integrated with outside sources of retirement funding as well.
Be sure to check out the complete article in the October issue of Kiplinger or online.