Ask Money

A state pension and, what else?

Chris Farrell Dec 20, 2010

Question: Hi guys, I’m going to be graduating with an accounting degree this Saturday and I’m having a bit of a dilemma. I’ve accepted a well paying position with a Maryland state oversight and audit agency, but their only retirement plan is a state-administered defined benefit plan. Pension reform is a big issue every election year, so I’m a little worried about what my post-employment benefit plan will look like five or ten years down the road. Even if nothing changes, defined benefit plans aren’t the most portable investments in the world.

There is no 401k matching scheme at the moment, so would you recommend investing in something like an IRA immediately, wait and see what the legislature does, or invest in something else entirely? Thanks for your time, I love the show. Evan, Salisbury, MD

Answer: Congratulations on graduating with an accounting degree and the job.

You’re right to be concerned. Despite some hysteria, state and local government pensions aren’t going away. But change is coming to many plans considering the yawning budget deficits of most state and local governments.

It’s highly likely that benefits will be trimmed, employee contributions raised and, in many cases, a portion of the defined benefit plan turned into a 401(k)-type pension for new workers.

Still, you’ll be vested in the plan after 5 years, which isn’t that long. And it’s a good benefit.

I would consider opening a Roth-IRA. It’s the most valuable of all the retirement plans you can open on your own. The contributions into the plan are made with after-tax dollars. The kick comes with retirement: The gains are tax free.

At the same time, I would set it up so that a portion of your earnings automatically goes from your checking account into a savings account. It doesn’t have to be much at first. The trick is to get the taxable savings accounts growing early in your career. The financial discipline will pay off enormously over the years.

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