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Income Replacement: What is it?

For early to mid-career employees The thought of retirement may not be on your radar, but have you ever thought about where your income will come from in retirement? Sure, it may not seem important now, but the amount you start saving and when you start saving will have a huge impact on your income replacement in retirement. What’s income replacement you ask? Income replacement is a term for how different sources of income in retirement will add up to replace some or all of your pre-retirement paycheck. In a recent survey of Missouri state employees, 37.7% of workers under the age of 35 were unsure of where their retirement income will come from. A state of Missouri employee’s “retirement paycheck” is typically made up of three sources: your defined benefit pension plan, social security, and personal retirement savings, such as MO Deferred Comp. The defined benefit pension plan, provided by either MOSERS or MPERS, is a benefit you receive as long as certain working requirements are met. This benefit is created using a formula; Final Average Monthly Pay (FAP), times a multiplier, which is established by legislation, times your years of credited service, both earned by working and any service you are qualified to purchase. This calculation produces your monthly pension benefit amount. The next source of replacement income is your social security benefit. You can collect early social security benefits at the age of 62 but by starting early, you are taking a permanent reduction in the amount of your benefit. Your full social security benefit would occur between age 65 and 67, depending on your year of birth. To find out when you will be eligible for full benefits and what your benefit payment would look like, visit ssa.gov. You may be thinking this won’t be enough to replace your income in retirement, and that’s probably a true statement for many employees. This is where your personal savings for retirement comes into play. Keep in mind, you have limited control over your defined benefit pension and social security, so saving smart with deferred comp can help give you that extra savings boost and higher income replacement. Estimating what your retirement needs may be in the future will help determine how much you’ll need to save. Use the Grow your Retirement Savings Calculator to see how your contributions will add up over your career. To increase your contribution, logon to modeferredcomp.org and click the 457 plan “Contributions” link on the home page. By increasing your contribution, you’re preparing for the future! You can also give us a call at 1-800-392-0925. Plan for the retirement you want and start saving more NOW!