Important Strategies Teachers Should Consider When Planning for Retirement
If you are a teacher this is it, the last stretch, for the school year that is, you might still have many years ahead if we’re talking retirement. If that is the case, there are some things that you should be thinking about now.
For teacher’s retirement planning can be complicated, as there are many variables. You may be eligible for a pension plan, and the value of your plan will depend partly on your employer, but mostly on your ending salary and your years of service and a multitude of many other factors. Also, the contribution plans that are available to you vary depending on if you teach in private/nonprofit schools or the public-school sector. Every state has a different system with how they handle pension and retirement for teachers. Make sure that you are familiar with your state’s process.
Figuring it all out on your own and trying to make the best decisions could be challenging without consulting a professional, but here are a few tips to get you thinking about it.
Many Teachers Are Not Eligible For Social Security
For most workers, participation in Social Security is almost automatic. Employees pay a 6.2% payroll tax to fund Social Security, which employers match dollar for dollar.
In some states government workers, including teachers, do not pay into the Social Security system. If you live in Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, and Texas, you most likely do not pay Social Security taxes. In addition, some other states — Georgia, Kentucky, and Rhode Island — have varying degrees of coverage that differ by school district.
In states that teachers do not participate in social security the school system has alternative and somewhat equivalent pension plans available for their employees. An example would include, California, where teachers participate in a program called CalSTRS and do not pay into Social Security; they pay into the CalSTRS fund instead. But teachers who participate in the California Public Employees Retirement System (CALPERS) do pay into Social Security.
In addition, if your spouse pays Social Security taxes, you might be eligible for spousal Social Security benefits, but these benefits might be reduced because of your pension under government pension offset rules. Often teachers do not understand this and rely on spousal Social Security benefits, only to find out later that they are dramatically reduced by the GPO rules.
You can also qualify for Social Security if you’ve worked in the private sector, but it typically takes at least 10 years of private-sector work to earn enough credits to qualify for Social Security.
Because of the many variables and individual circumstances asking a friend or colleague about retirement benefits is not the best idea. It is vital to understand the conditions under which your pension benefits work for you specifically when it comes to Social Security benefits.
Don’t Depend Solely on Your Pension
Even if you are eligible for a pension, unless you are making significant efforts to maximize it, your pension will most likely not be enough for you to maintain the standard of living that you’re used to. The earlier in your career that you start utilizing other tax-advantage retirement programs, like traditional IRA’s and Roth IRA’s the better position you will put yourself in.
If you work full-time for a public school or a tax-exempt private school, you should be eligible to contribute to a 403(b) plan. A regular 403(b) lets you contribute pretax dollars from your salary and lets you put that money into investments you choose among the options offered by the plan. Contributions grow tax-deferred, and you pay tax on plan withdrawals in retirement. If you’d prefer to pay taxes on the money now instead of when you retire, and if your employer offers the option, you can contribute to a Roth 403(b). In many cases your employer can also make matching contributions to your plan.
Most public-school districts offer a 457(b) plan. With this plan you can save pretax dollars. If you work for a private school that is classified as a tax-exempt organization, according to the federal government’s rules, you may not have access to a 457(b).
In 2018 the maximum you could contribute to either of these plans was $18,500. Although if 50 or older you could contribute an additional $6000, with the catch-up contribution plan. Regarding the 457(b), when you’re three years away from the plan’s stated retirement age, instead of catch-up contributions, you can opt to start saving the lesser of either twice the annual limit or the sum of the current year’s limit and any unused portions of previous years’ contribution limits.
A disadvantage of 457(b) plans is that employers usually don’t provide matching contributions because they are already providing a pension.
On a positive note, when you leave your job, you can start taking distributions from your 457(b) without penalty, even if you haven’t reached retirement age.
Whether you participate in a 403(b), 457(b) or both, make sure you understand the fees associated with both the plan itself and the investments offered within the plan before you contribute.
Do You Plan to Work After You Retire from Teaching?
Many teachers long for the day that they can retire and do the things that they love to do all summer, but not everyone can afford to quit working after retiring from a full-time career in teaching. If you expect to teach part-time, work in another profession part-time or start a completely new career, think about how that income might influence your financial situation at the time. In some situations, it could be a disadvantage and you’d be better off staying in your current position a bit longer or relishing in your hobby and not concern yourself with additional income because the benefits don’t pan out.
If you do want to work, make sure you understand how continuing to work will affect your retirement benefits. Keep in mind that certain job choices will reduce your benefits, depending on your retirement plan’s rules.
Consider Hiring a Professional to Help
Consulting an expert can be very beneficial. Planning for retirement when you’re a teacher is not the same as someone that works in the private sector, especially if you work for the public-school system.
You encounter many challenges that private-sector employees don’t, such as when to retire to maximize your benefits and how to select part-time or post-retirement work that doesn’t reduce your retirement benefits from teaching. Your unique circumstances mean you’ll need to do extra work to make sure your retirement is secure. The earlier in your teaching career that you start to think about these things will prove to be most beneficial to you. It is advised to seek advice, often it’s free, from a retirement counselor from your state five years before your retirement date. Unfortunately, many teachers wait until the last months of their tenure, then find out they didn’t plan to the best of their retirement pay options.
If you need assistance or would like a free consultation please contact our office at 248-524-5240.