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Retirement Planning For Teachers & Educators

As a teacher, you always give 110%. You put in long hours, work on the weekends, and create a vibrant classroom environment to meet your students’ learning needs.

Educators face unique financial concerns when it comes to their retirement. But when it comes to preparing for retirement, many teachers put off critical decisions. Below are the top three concerns we see educators face regarding their retirement - and what you can do to address them head-on.

Understanding Your 403(b) Plan

A 403(b) plan works similarly to a 401(k) at a surface level. Money is withdrawn from a teacher’s paycheck (typically pre-tax) and grows in a retirement savings account until retirement. As with a 401(k), some 403(b)s offer the ability to contribute to an after-tax Roth 403(b).

Like a 401(k), funds placed in a traditional 403(b) aren’t taxed until withdrawn, and employers can choose to make matching contributions while funds from a Roth 403(b) are withdrawn tax-free. But a significant difference is that a 403(b) plan is often a tax-sheltered annuity with some mutual funds available. In fact, in something of a victory for the annuity sales industry, many school systems call their 403(b) a “TSA,” even though there’s no requirement that teachers invest in an annuity. This label is unfortunate, as it often creates the impression that only an annuity, with its additional unnecessary costs, is acceptable for use in a 403(b).

Another key difference between a 401(k) plan and a 403(b) is that employers typically only have one 401(k), but some employers offer many possible 403(b)s with a wide variety of features and costs.

When selecting a 403(b) plan from your employer, you’ll likely have a variety of options that involve varying levels of risk. It’s common for teachers to have questions about the differences between these options; working with an independent financial professional to analyze your possible choices can help you decide what’s best for you. Remember that the person offering a consultation at no cost to you is likely being paid to sell you a product. Choosing the wrong option for your retirement needs could substantially impact your future withdrawals.

The Realities of Your Pension Plan

About 88% of teachers participate in a defined benefit pension plan.1 Most professionals don’t have access to this type of pension plan, which often provides benefits others would envy. Make sure you understand how your payouts would work in retirement.

Note that being enrolled in a pension plan upon employment does not mean you will meet the vesting requirements. For most states, the requirement is five years of employment, while some require ten. If you leave before this time, you will not be eligible to receive your pension when you retire.

Additionally, most pensions do not completely cover your working salary, so paying into a pension system does not eliminate the need to save for retirement. How much you receive from your pension when you retire will depend on various factors, including your salary and years of service. Read the fine print of your plan and ask around to determine how much you could expect to receive in retirement. Many pension plans offer online calculators you can use to estimate your future pension income. This can help you determine how much you’ll need to save to cover your expenses and maintain your standard of living in retirement.

Social Security Benefits (Or Lack Thereof)

Many teachers are not eligible to receive Social Security benefits in retirement. Approximately 40% of K-12 teachers do not pay Social Security taxes, and therefore will not receive Social Security benefits from their work as teachers.2

This accounts for about a million educators in 15 states, including:

  • Alaska
  • California
  • Colorado
  • Connecticut
  • Georgia
  • Illinois
  • Kentucky
  • Louisiana
  • Maine
  • Massachusetts
  • Missouri
  • Nevada
  • Ohio
  • Rhode Island
  • Texas

Even if you or your spouse have contributed to Social Security from other employment, there are two different ways a potential Social Security benefit is reduced for teachers who have earned a pension while working in a position where they didn’t contribute Social Security:

The Windfall Elimination Provision (or WEP) reduces the amount the teacher would receive on their own Social Security record, sometimes by more than half.

Government Pension Offset (or GPO) reduces the teacher’s spousal or widow(er)’s benefit—based on the Social Security record of their spouse—by $2 for every $3 of pension they’re entitled to, sometimes eliminating these Social Security benefits entirely.

Download the Social Security Administration’s fact sheets on WEP and GPO for more details.

For millions of retirees, Social Security offers a steady, reliable income source in retirement. If you are a teacher in a state that does not have you pay into Social Security, it’s essential to remember that your pension is frequently provided instead of, not in addition to Social Security in retirement.

Preparing for retirement as a teacher can come with its own challenges, but it often has benefits, too. In any event, it shouldn’t be put off or ignored. Those who begin planning early tend to have more choices about when to retire and what they want to do with themselves after their teaching careers. Working alongside your school’s HR department and your financial advisor can help you feel more confident in your retirement plan. You give your all every day; make sure your money will be set up properly to look after you when you need it.'

  1. https://www.bls.gov/ncs/ebs/benefits/2019/ownership/govt/table02a.pdf
  2. https://www.npr.org/sections/ed/2018/04/20/602846417/why-more-than-a-million-teachers-cant-use-social-security#:~:text=Walkouts%20And%20Teacher%20Pay%3A%20How,the%20workforce%20is%20not%20covered.%22
This content is developed from sources believed to be providing accurate information and is provided at least in part by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Original content of Practical Financial Planning, Inc. only is copyright © 2021 by Practical Financial Planning, Inc.