If you’re preparing for retirement as an Alabama state worker, it’s important to know about the retirement plan you may be eligible to participate in. The state’s retirement system is administered by the Retirement Systems of Alabama. In the U.S., each state has its own unique retirement system for government employees. For example, the Florida retirement system includes an investment or pension plan that’s different from the Alabama system.
There are three retirement systems in Alabama and the plan a state worker is eligible to participate in depends on their occupation. Each retirement savings plan is a little different. As a participant, you contribute a percentage of your pay to your retirement plan and when you meet retirement qualifications and terminate employment, you begin to receive pension pay from your plan.
The benefit payments you receive are a source of retirement income that can help you live comfortably when you stop working. Reviewing your specific pension plan guidelines and estimated retirement benefits may help you to better choose your retirement age and investments.
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Types of Retirement Systems in Alabama
In Alabama, state employees are eligible for one of three different retirement systems. The retirement system you qualify to participate in depends on your occupation and which plan your employer offers.
Employees’ Retirement System
If you’re a state employee, you are required to participate in the Alabama Employees’ Retirement System (ERS). Eligible state employees include most part-time and full-time employees who work for the local government. Law enforcement officers and elected officials are also required to participate in this retirement plan.
To be eligible, you must work at least 20 hours per work with the state, earn at least Alabama’s minimum wage, and must not be considered a temporary employee, unless you’re contracted to work for more than one year. Your contribution rate depends on your occupation, how long you’ve been contributing to the ERS, and the tier that applies to your situation.
There are two tiers in the retirement system that vary based on your employment start date with the state. If you began eligible employment before January 1, 2013, you’re in Tier 1. If your employment start date was on or after January 1, 2013, you’re in Tier 2.
Regular Tier 1 state employees are required to contribute 7.5% of their pay. Full-time workers, correctional officers, state firefighters, law enforcement officers, and certified employees in Tier 1 are required to contribute 8.5%. Tier 2 regular state employees must contribute 6% of their pay while state and local firefighters, certified workers, full-time employees, law enforcement officers, and correctional officers must contribute 7% of their salary.
When you reach retirement age and stop working, the pension benefits you’re eligible to receive are calculated based on the following formula:
Your average final salary multiplied by the number of years you worked multiplied by the benefit factor and divided by 12 equals your maximum monthly benefit.
Your average final salary is calculated using the average of the three highest salaries you earned throughout your final 10 years of employment. For most regular state employees, the benefit factor is 2.0125% and for most state police officers, it’s 2.875%.
For example, say you worked as a state employee in Alabama for 15 years and earned an average salary of $50,000. Your maximum monthly benefit calculation would look like this:
$50,000 times 15 times 2.0125% divided by 12 equals $1,257.81.
In this case, your maximum monthly benefit for your retirement plan is $1,257.81. Keep in mind, this doesn’t factor in whether you retired at an earlier age, other retirement income besides your pension plan, and retirement income taxes you may owe on these distributions.
Teachers’ Retirement System (TRS)
Only public school teachers are eligible to participate in the Alabama Teachers’ Retirement System (TRS). This retirement plan includes the same two tiers as the ERS, which are also used to calculate the percentage of pay a teacher must contribute to the account.
When teachers retire, the same formula is used to calculate their pension benefits in the TRS plan as is used for retirees who participate in the ERS. In addition to retirement benefits, the TRS also provides full-time public education institution workers access to the Public Education Employees’ Health Insurance Plan (PEEHIP). This health insurance plan helps these workers reduce medical costs, but employees do not have to enroll.
Judicial Retirement Fund (JRF)
Alabama’s Judicial Retirement Fund (JRF) is reserved for circuit clerks, district attorneys, judges, and justices who were elected or appointed into their positions on or after November 8, 2016. Eligible employees are required to participate in this retirement plan and must contribute 8.5% of their pay.
When you retire, one of two different benefit calculations apply to your situation, depending on your occupation. If you were employed as a district attorney or city clerk, your maximum monthly retirement benefit is calculated using the following formula:
Your average final salary multiplied by the number of years you worked multiplied by 3% and divided by 12 equals your maximum monthly benefit.
For example, say your average final salary is $60,000 and you worked as a city clerk for 14 years. You would calculate your maximum monthly benefit as follows:
$60,000 times 14 times 3% divided by 12 equals $2,100.
As a city clerk or district attorney, your maximum monthly benefit cannot exceed 80% of your final average salary. When calculating the number of years you worked, you can add in partial years.
If you worked as a judge or justice, your maximum monthly benefit calculation is slightly different. You would use the following formula:
Your average final salary multiplied by the number of years you worked multiplied by 4% and divided by 12 equals your maximum monthly benefit:
Your maximum monthly benefit cannot exceed 75% of your average final salary as a judge or justice. If you worked for 18 years or longer as a judge or justice while contributing to your JRF, the retirement benefits you receive when you stop working are equal to 75% of your final average salary.
Alabama Retirement Taxes
When planning for retirement, it’s important to review the federal income tax on retirement income, as well as state taxes you may be responsible for paying.
As an Alabama resident, you benefit from low property taxes. However, you’ll owe Alabama state taxes that range from 2% to 5% on retirement income you collect when you stop working. The state’s retirement income tax doesn’t apply to pensions, so the money you receive from your state employer’s retirement plan isn’t taxable.
While you don’t have to pay state taxes on your pension benefits, you are required to pay federal income taxes on the money you receive. You may be required to report your pension benefits, Social Security benefits, 401(k) and IRA distributions, and other retirement income you collect to the Internal Revenue Service (IRS).
Financial Health of the Alabama System
The Alabama Retirement System is known for having historically strong financial health. According to the 2018 RSA Annual Report, there are 358,506 state employees currently contributing to retirement plans within the system.
$3.3 billion in benefits were paid to retirees in 2018. The Alabama Retirement System is stable and financially healthy, but as a state worker, it’s still important to ensure you have a diversified retirement plan.
Alabama Retirement Calculators
It may be beneficial to estimate your potential retirement benefits when creating a solid retirement plan. The Retirement Systems of Alabama online calculators can help you estimate the benefits you may be eligible to receive when you stop working.
Retirement Planning Tips
It’s important to have a realistic retirement plan in action as soon as you can. To effectively save for retirement, you should:
- Create a budget that includes retirement savings contributions.
- Pay off debt as much as you can before reaching retirement age.
- Review the retirement and health care benefits you’ll be eligible to receive when you stop working, as well as any out-of-pocket insurance expenses.
To live comfortably in retirement, you’ll also need to focus on remaining financially stable by:
- Sticking to a budget that keeps your expenses below your income.
- Not collecting debt through credit cards or loans.
- Considering a part-time job or side gig to earn extra income.
Your Alabama state employee retirement plan provides you with pension benefits when you retire, as long as you’re eligible to receive these payments. While your pension plan is helpful in providing retirement income, it’s important to diversify your retirement strategy to ensure you can live comfortably as a retiree.
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