There are plenty of reasons why contributing to your self directed IRA is a good reason but I will be discussing one in particular. We hear a lot about saving for retirement but what about pensions? How are they fairing at the moment? Let’s dive into pensions and see if your state is adequately managing their pension liabilities.
As of the end of 2012 Morningstar (they conducted the research) found that the majority of states are “adequately managing” their pension liabilities. Let’s dig deeper into some of the research that they found.
Even though the majority of states are “adequately managing” their pension liabilities the health of all states varies quite drastically. 29 states have a pension funded ratio of at least 70%, which is at the level Morningstar considers a pension fiscally sound. Thirteen states have a funded ratio above 80% and seven are able to pay 90% of their obligations. What about the other 21 states? Morningstar found that the other 21 states were seriously underfunded, all under 69% funded.
Another important factor in determining the health of a pension system is the unfunded actuarial accrued liability (UAAL) per captica. The UAAL per capita is the amount each person in the state would have to pay to make up the unfunded gap. The key here is you are looking for a low cost per capita. For the states that have fiscally sound pension plans eight state have a UALL per capita under $1,000. Actually, Wisconsin has a UAAL per capita of less that $100 and has done so for the past five years of data given in the report. Twenty of the states that do not have fiscally sound pension plans have a UAAL per capita over $3,000. Let’s take a look at the best and worst states from Morningstars’ study in regards to the states’ funding ratios of their pensions. Below is a great infographic of the data I found at advisorone.com
Is your state on the bottom of the list? Is it on the top? Regardless of where your state pension plan lands compared to other states it is best to try and rely on yourself for your own retirement. One of the biggest benefits to your self directed IRA is that you control it. You can invest in what you want to and you can contribute to it annually. Of course there rules you have to follow but the earlier you set up a self directed IRA and contribute to it the more likely your retirement is going to be a great one. Everybody has a different situation and you always should talk to your tax accountant with your specific questions and direction. One thing is for sure, the earlier you can save and the more you can save the more you will be able to rely on yourself for your own retirement than someone else or the government.
Author: Nick Barker