Retirement Planning for Teachers
Teachers have special financial considerations to make before retirement. Here’s what goes into an educator’s retirement and how an advisor can help.
Retirement may seem like an object you can barely see in the distance; however, it’s as important as ever to begin planning for life after work. This is especially true for teachers due to their ability to access specific types of retirement vehicles, such as a pension and 403(b) plan. It’s also important for educators to understand how to manage their social security benefits, as about 40% of teachers don’t pay into the program.
If you’re a teacher, it’s vital to understand what you can do now to prepare for those seemingly far-off retirement years. Through the right retirement vehicles and the power of compound interest, you can set yourself up well for the future and, potentially, retire early. In this article, we’ll outline the key factors educators should consider for retirement, as well as how a financial advisor can help you.
What Goes into Retirement Planning for Teachers
As mentioned above, it’s key to plan for retirement as soon as you can. If you’re an educator, you’ll likely have access to powerful financial vehicles, such as a pension and 403(b) plan, which can work to set you up comfortably later in life. Additionally, the more you put away now, the more you’ll be able to invest and earn compound interest on over the years.
The general rule of thumb is that you’ll need at least 70% of your pre-retirement income to retire comfortably. So, it’s imperative that you start thinking ahead about what sources of income will sustain your lifestyle after your career ends. For many, this comes from a combination of the following:
- Savings and investments
- Pension plan
- Social security benefits
Teachers looking to retire should also consider how they’ll pay for health care after they’re done working. Medicare doesn’t kick in until age 65, so, early retirees may need to pay for insurance out of pocket. For this reason, how you pay for or receive medical care should be another important consideration during your planning process.
Retirement Plans for Teachers
Most teachers can make use of three different types of retirement plans. Your pension and social security benefits work to provide income once you retire. On the other hand, contributions during your career to a plan such as a 403(b) allow you to invest and grow your money over time. Below is a more specific breakdown of each type of plan:
A defined benefit or pension plan provides income to retirees through regular payments. Throughout your career as a state-employed teacher, you’ll automatically pay into a pension. The state will then invest and manage these funds on your behalf.
Since you don’t get to decide how much to put in, what you end up earning from your pension depends on several other factors. These include details such as your age, state tenure, and salary. The growth of the pension fund (or lack thereof) based on the investments it makes may also play a role.
Defined Contribution Plans
With a defined contribution plan, you get to decide exactly how much (or how little) you’d like to deposit regularly. Then, it’s up to you to invest these funds to ensure long-term growth through compound interest. Once you withdraw the money, you’ll usually be responsible for paying income taxes.
For public school teachers, a defined contribution plan usually refers to a 403(b) (or tax-sheltered annuity) plan. These operate much like a 401(k) plan, in which you contribute amounts from your salary into an account. As mentioned, you’ll only be responsible for paying taxes on funds within the account if you make withdrawals.
Keep in mind that, while you get to decide how much to put in, contributions out of salary are limited to $22,500 annually as of 2023. Employees who are age 50 years or older may also make catch-up contributions of $7,500 as of 2023. You should also be aware that withdrawing funds before you turn 59.5 years old results in a 10% penalty.
Another option for state employees is a 457(b). This is a tax-advantaged deferred compensation plan. It allows you to elect to save money from your salary in a separate savings account, which you can then withdraw from at retirement. As of 2023, the annual contribution limit for 457(b) plans is $22,500.
Social Security Benefits
If your state allows you to pay into social security through your teaching job, you’ll also be able to leverage those benefits after you retire. Once you reach at least 40 credits, you’ll be eligible to receive payments at your retirement age. Keep in mind that there are several ways you can maximize payments, such as waiting to collect money and claiming spousal benefits.
|Pension Plans||Consistent income. Growth over time. Employer shoulders investment risk. Payments last for life.||Less flexibility and control.|
|Defined Contribution Plans||You have complete control over contributions and investments. Able to earn compound interest through investment growth.||Contribution limits. Early withdrawal penalties. You take on investment risk.|
|Social Security||Consistent payments for life.||Payments may not be enough to live on. You typically need to wait until your mid-60s to earn sizable benefits.|
Other Tax-Advantaged Accounts
While you’ll most likely prioritize your focus on teacher-specific plans such as a 403(b) or pension, there are other ways you can save in preparation for retirement. Individual retirement accounts (IRAs) are another great way to save and invest for the long term. They allow you to contribute up to $6,500 per year ($7,500 if you’re over 50 years old) and then withdraw funds once you’re 59.5 years old with certain tax advantages.
Traditional IRAs are tax-deferred, which means you’ll be responsible for income taxes on withdrawals only. On the other hand, withdrawals for Roth IRAs are tax-free, including any profits you make within the account. Funds in the account grow through gains you make via investing in various securities, such as:
How Teachers Should Save for Retirement
In general, everybody should be saving consistently for retirement. The sooner one does, the earlier they can benefit from the power of compound interest. However, the savings approach you take will depend on three crucial factors:
- When you want to retire. If your goal is to retire early, you’ll need to save as much as you can as often as possible. Most people end up living below their means to do so, which can differ from a traditional savings approach.
- Your desired lifestyle. How you want to live once you retire is crucial here because it’ll inform how much you need to save. For instance, if your goal is to travel often, you’ll want to account for this ahead of time.
- When you started making contributions. The sooner you start saving, the earlier you can take advantage of compound interest. However, beginning your retirement planning later on can mean you’ll need to save more annually to make up for lost time.
Consider Hiring a Financial Advisor
Without a plan in place, staying on track toward retirement can feel overwhelming. And, unless you’re a finance whiz, it can be hard to know the most optimal way to save and invest for the future. For this reason, it may be wise to hire a financial advisor to help you develop a comprehensive plan that you can feel confident in and stick to.
For retirement purposes, a financial planner is likely most well-equipped to assist you. These experts specialize in working with clients to develop a retirement plan. In general, a retirement planner should be able to provide the following services:
- Assessing your current financial situation
- Investment management
- Maximizing retirement income
- Helping you overcome challenges as you approach retirement
During your search for a financial advisor, look for those with prestigious credentials like Certified Financial Planner (CFP) and Chartered Financial Consultant (ChFC). Experts with these titles must adhere to strict standards and complete rigorous requirements to earn their designation.
If you need help finding a financial planner in your area, we recommend you use a free matching tool, such as this one. It will ask you to complete a short quiz regarding your current financial situation and your goals (such as planning for retirement). Then, it’ll present you with up to three fiduciary advisors near you.
Frequently Asked Questions
Can you collect social security and teacher retirement?
Yes, you may collect payments from both social security and your teacher-specific pension. However, if your total income from these two sources and any others exceeds $25,000, your social security benefits will be subject to taxes.
Can a teacher retire after 20 years?
Technically, yes, a teacher can retire after 20 years of service. However, keep in mind that their pension may be diminished. 26 states require employees to have a minimum number of years (typically 30) before attaining a full pension.
If you still want to retire early as a teacher, you’ll need to plan on having other sources of income to supplement your lifestyle. This includes those from tax-advantaged savings accounts, such as an IRA, as well as from other investment accounts. Achieving this will likely also require you to live below your means during your career, allowing you to save as much as possible.
Does teacher retirement transfer from state to state?
Unfortunately, you won’t be able to transfer your teacher pension to another state. Additionally, most states require you to rack up at least 10 years of service before your pension vests.
Is a teacher pension plan enough to retire on?
The answer to this question depends on your goals, lifestyle, and whether you have other investments to supplement your pension. A pension will provide you with consistent lifetime payments; however, it’s only a percentage of what your previous salary was. For most, it’ll be crucial to have other retirement plans in the fold, such as a 403(b), IRA, and social security benefits.
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