Quick Chat about Taxes…

During this time of year, you may not be thinking about taxes. Instead, if you’re like me, you’re thinking about playoff baseball, football, fall festivals, and many other wonderful things that come with the onset of autumn. However, I think it might be a good idea to give you a quick refresher on how taxes will affect your retirement planning and your LAGERS benefit.

First and foremost, don’t make the mistake that many retirees make and think that you will not need to worry about taxes because you are retired. In other words, some retirees think that since they are retired and will have less income, their tax liability will be less. For some, this may be true. However, the earlier phase in retirement, in some circles called the “go-go” phase, may require you to have more income because of your lifestyle. So, be careful to not to fall into that way of thinking.

Secondly, it is helpful to consult the services of a Certified Public Accountant (CPA) to properly plan how you will handle your taxes in retirement. A CPA is going to be able to help you plan accordingly based on your entire income picture. They will help you with your deductions, how much of your retirement account withdraws should be held back for taxes and much more. They will help keep you prepare and ensure that you will not have any surprises on April 15^th.

Here are a few refreshers about taxation of your LAGERS benefit:

• Your benefit is subject to State and Federal income taxes. However, it is not subject to Social Security or Medicare withholdings. It will only be subject to regular income taxes.
• Withholding taxes from your LAGERS benefits is something that you will need to setup when you retire. But, it can be changed throughout retirement. For more information about withholding, read my previous taxes blog.
• In the State of Missouri, your public pension income may be tax exempt if you meet the eligibility requirements set by the Missouri Department of Revenue. Generally, if your income is less than a certain amount, your pension income will be tax exempt, with some limitations. For more information, read my previous blog about taxes.
• If you paid in a 4% contribution at any point in your career and still have a contribution balance with LAGERS, a portion of your monthly benefit every month will be non-taxable. Read Pam’s blog about taxes to get more information about this and other taxation topics.

Those are just a few quick topics to consider regarding only the taxation of your LAGERS benefit. In retirement, you may have other sources of income that have different rule for taxation. This is why it is best to consult a CPA and properly plan for all of your taxable income.  I hope this helps give you some guidance in regards to your taxes.

*LAGERS staff will not be able to give you any taxation advice

Jeff Pabst, CRC

Education and Outreach Coordinator

Why You Shouldn’t Think of Your COLA as a Raise

 

One of the most common questions members ask at Pre-Retirement Seminars is ‘what is the average cost of living adjustment LAGERS retirees receive each year?’

This is a tricky question to answer because while we can historically look back at the average annual adjustment to retiree benefits, it doesn’t really tell us much about what retirees can expect (or should plan for) in the future.  In fact, it would be a mistake to think of your cost of living adjustment as an annual raise you that plan for each year.  Your LAGERS’ COLA isn’t a raise, because it’s not designed to just put more money in your pocket from year to year.  Rather, it is meant to help the benefit you retire with maintain its purchasing power over a long period of time.

Your COLA helps you maintain your current standard of living throughout retirement by ensuring that as the cost of goods and services increase, your LAGERS benefit can continue to purchase the same basket of goods, even as they continue to get more expensive.  Just keep in mind, the cost of living doesn’t always increase at a steady rate (sometimes it even goes down), and these fluctuations mean that your COLA will vary from year to year.  But no matter what, LAGERS retirees know that their benefit will always keep pace with inflation, enabling them to comfortably maintain their standard of living well into a twenty or thirty year retirement.

 

A Secure Retirement for Local Government Workers Brings Major Economic Payoff for Missouri

Did you know that every person living in Missouri benefits from the LAGERS system? How can that be, you might ask? While not every Missourian is actually drawing a benefit from LAGERS, the economic benefits produced by retirees spending their benefits, ripple throughout Missouri’s economy. This retiree spending produces major economic impact that affects each and every person living in our great state!

Here’s how: Each month, LAGERS pays out benefits to a retiree. These aren’t just any old benefits, mind you, these are benefits that were earned through often decades of public service; providing the necessary public services that keep our amazing local communities up and running every day. That retiree then takes that hard-earned benefit and SPENDS it! Approximately 91% of LAGERS retirees remain in Missouri, meaning a vast majority of LAGERS benefits are being spent right back into the local communities in which they were originally earned! In 2016 alone, that was to the tune of $244 million paid back into Missouri’s economy!

 

But the buck doesn’t stop there. Those retiree dollars keep on working, and the more retirees spend, the more local businesses can grow and further invest in their local economies. As local businesses boom, they hire more people, more businesses open their doors, all generating economic growth. In fact, according to the National Institute of Retirement Security, every $1 in state and local pension benefits paid in Missouri ultimately supported $1.41 in total economic output.

 

The impact of LAGERS’ retiree dollars is powerful and for many communities in Missouri can be an important economic lifeline. LAGERS is available to all local government units, big and small, in every corner of the state. The average LAGERS employer has fewer than 50 employees with many employing just 2 or 3.  LAGERS provides the economies of scale and financial expertise that smaller employers can’t often access on their own.  Furthermore, according to the Economic Policy Institute, high income families are 10 times more likely to have retirement saving than low income families. Having access to the LAGERS system helps ensure that all public servants regardless of where you live or how big your employer is have access to a secure retirement.  And having a secure retirement means a big economic payoff for your community in retirement.

 

Elizabeth Althoff
Communications Specialist

The Story of LAGERS

Check out this video about how LAGERS came to be.

Throughout the years, one thing has remained constant, the need for a secure retirement. When LAGERS was created the purpose was to provide a secure retirement for Missouri’s public servants. It’s is just as important today, as it was then.

At LAGERS, we believe in a secure retirement for all, and serve that vision by forwarding our founders’ mission of providing retirement security to local government workers in Missouri. Someday, as our vision says, we hope that everyone has access to a secure and dignified retirement.

LAGERS Lingo

Typically, when one enters a new job or profession, he or she is confronted with a daunting task of learning the vocabulary and jargon of that particular field of work. The same can be said for me upon my recent employment at LAGERS. As I traverse this new world of pension vocabulary, I think it might be beneficial to pass my new found knowledge on to you, as I am assuming pension jargon is a foreign language to most who are not directly involved with the field of public pensions.

Though it may seem sophomoric, the first word of great importance in my new line of work is LAGERS. There are numerous people, including myself, who thought LAGERS was an acronym for Local Area Government Employees Retirement System.Much to my chagrin, I quickly learned LAGERS is actually Local Government Employees Retirement System. There is no “Area” in the name.

The next term of importance is defined benefit (DB) pension plan, the kind of plan LAGERS offers. A DB is a type of pension plan where the member is provided with a permanent, protected monthly benefit for the rest of his or her life after retirement. The monthly benefit received by the member is based on the following formula:

Benefit Program X Credited Service X Final Average Salary (FAS)

It is NOT based on how much an employee or employer has contributed to the plan or how well those contributions were invested. That type of plan would be considered a defined contribution (DC) plan and is not a lifetime benefit plan. With the defined contribution plan, benefits are paid until the account balance runs out.

As previously mentioned, the DB is calculated by a specific formula. The first part of this formula is the benefit program chosen by the employer. At LAGERS, there are many options from which an employer may choose. The following is a list of some of those options which determine the multiplier for the formula:

L1 = 1.0%
L3 = 1.25%
L7 = 1.50%
L12 = 1.75%
L6 = 2.00%

Let’s say an employer chooses the L7 plan; the first number (or multiplier) to put in the benefit formula would be 1.50%.

Now for the next number of the formula: credited service. Credited service is the amount of time an employee works for a LAGERS employer. It is calculated as the sum of membership service and prior service. Membership service is any employment earned after an employer has joined LAGERS. A member earns one month of credited service toward his or her benefit for every one month of LAGERS covered employment. Prior service is employment prior to the date an employer joins LAGERS. A LAGERS employer has the option to cover 100%, 75%, 50%, or 25% of prior service. The longer an individual works for a LAGERS employer, the larger his or her benefit will be upon retirement.
So, let us say an employer chose the L3 plan, and the employee has earned 25 years of credited service. The formula, so far, looks like this:

1.25% X 25 X FAS = lifetime monthly benefit.

Let’s finish the equation. FAS, or Final Average Salary, is calculated as either the highest of 36 or 60 consecutive months of wages (depending on the employer’s election) from an employee’s last 120 months (10 years) of credited service. So, if the final average salary of the sample employee above is $2,981, the final equation to calculate that person’s lifetime monthly benefit looks like this:

1.25% X 25 X $2,981 = $931.56.

That individual would receive $931.56 a month for life.

So, now we have a basic understanding of the vocabulary and process of calculating a LAGERS benefit. Yes, there are many more terms to understand, especially within the payment options part of one’s benefit plan, but for now, rest assured. You have succeeded in the interpretation and understanding of a very complex group of terms used within the world of LAGERS.