- A state retirement plan is a defined benefit plan. Defined benefit plans are plans that pay you a specific amount of money when you retire from your job. The retirement plan is funded by your employer and may be partially funded through a salary deferral. Your retirement may be partially or fully unfunded (less money is contributed to the plan than what would be required to pay full benefits at retirement) or fully funded (your pension is fully insured by an insurance company and all required contributions are made to meet retirement benefit promises).
- The benefit of your state pension plan is that you get a guaranteed income during retirement that is paid for by the state. The state manages the pension funds and distributes the money to you at retirement. You also have the option to take a reduced pension benefit and provide your spouse with a pension payment after your death. This flexibility allows you to retire with less money in personal savings than what you would otherwise need without a pension.
- The disadvantage to a state pension is that the pension may be unfunded. If your state uses an unfunded pension scheme, then payments are promised without actually having the money available to pay benefits. You must rely on the state's future ability to raise taxes or otherwise raise money to pay pension benefits. Additionally, because the state provides a defined benefit plan, your income is fixed. Your income may not be sufficient to pay for all of your retirement expenses as inflation rises.
- States also offer supplemental plans for workers. Government workers may participate in 403(b) tax sheltered annuities, for example. These plans allow you to defer some of your pay to your own retirement. This is money that is not managed by the state. Instead, you direct the investment account and make withdrawals from the account during retirement as needed. Alternatively, you may convert your 403(b) to guaranteed payments, similar to your state pension.
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