by Nicole Strbich
Director of Financial Planning
At the end of April this year, trustees for the State Teachers Retirement System (STRS) of Ohio voted to eliminate cost-of-living adjustments (COLA) beginning July 1, 2017. This change is expected to impact over 490,000 teachers and retirees statewide, who had previously been receiving 2% annual increases in their pension income.
This adjustment came after investment consultants advised STRS to reduce their expected annual rate of return for their investments from 7.75% to 7.45%. The consultants also recommended modifications to mortality estimates, as members are living longer, and a reduction to payroll assumptions since less money will be contributed from members and employers than previously expected. An open letter from Executive Director, Michael J. Nehf stated that the COLA change approved by the STRS board was necessary to keep STRS Ohio within the state’s funding target. The board plans to review this decision no later than 5 years from now. In the meantime, this change could have a dramatic impact on the income of current retirees facing rising costs and for current members’ retirement income planning.
As STRS Ohio and other pension plans look to trim benefits to deal with rising costs, it has become more important for members to avoid depending solely on a pension for their retirement income. There are several ways to start an individual savings program. Many employees have access to a defined-contribution retirement plan, such as a 403(b) or 401(k) account. This allows employees to defer income, pre-tax, into an investment account in their name with the funds accessible to them without penalty at age 59.5 or later. If you do not have access to one of these plans, you can contribute to a Traditional IRA instead – although the contribution limits to IRAs are much lower. Additionally, if you have a high-deductible health insurance plan, you can contribute to a Health Savings Account (HSA). These accounts allow you to defer income (ideally through your payroll), pre-tax, into an account that can be used for medical expenses at any time without taxation and without penalty. These funds can also be used after age 65 without penalty, although normal income taxes will apply if the funds are not used for medical expenses. Since these account balances carry over from year to year, HSAs are another good way to accumulate additional savings for retirement.