If you’ve been teaching for long, you’ve probably become an expert in planning ahead. It’s a good thing you’ve developed this skill because you’re going to need it as you start getting closer to retirement.
Teacher’s retirement planning can appear deceptively simple; you have a teacher’s pension and the option of an additional savings plan like a 403B. At face value, it seems that these simplified options should reduce your decisions and make the retirement planning process easier. But teachers have a unique retirement scenario that is much deeper than it appears on the surface.
Here are 3 reasons why your retirement situation is different than most of your non-educator friends.
1) You Have a Pension
You’ll probably receive a pension in retirement and that’s a good thing! I know a pension is pretty common in the public sector, but ask your friends who work in the private sector. I’ll bet not many of them will have a pension like you do. According to the Department of Labor, only 11% of private employees are covered by a pension. This is down from 85% in 1975. Pensions are dying. Those who have them are fortunate.
Pensions represent a lifetime stream of payments. In a Wells Fargo/Gallup survey, retirees were asked about their greatest retirement fears. In all, there were five common fears that retirees had.
-Running out of money
-Health and/or healthcare
-Stock market crash
-Losing their work identity
This same group was then asked to rank these retirement fears from most important to least. Care to guess which one came out as #1? In a landslide, retirees were most worried about running out of money. If that’s one of your fears, you can relax. Your pension mostly fixes this issue.
Sure, your lifetime payment of $2,500 per month may not seem as sexy as having a huge retirement account, but have you ever thought of how much money you’d need to replace that stream of income?
Let’s do the quick math.
Many financial planners follow the “4% rule.” This rule says that if you withdraw 4% of your retirement savings each year, and adjust for inflation, your money should safely last 30 years. Using this rule, we can calculate that in order to receive a monthly check for $2,500, you’d need at least $750,000 in your retirement account. Wow! That pension may be worth more than you thought.
2) Social Security for Teachers is Weird
Social Security gets a little strange for some teachers.
For teachers in the 15 states that do not participate in Social Security, the rules for collecting TRS and Social Security can be perplexing. The overabundance of bad information on the internet doesn’t help either!
If you’re a teacher in one of these states, there are rules that could affect your ability to claim your Social Security benefit. The rules are called the “Windfall Elimination Provision (WEP)” and the “Government Pension Offset (GPO).”
These two provisions reduce or eliminate benefits for individuals who worked at a job where they:
A) qualified for a pension
B) did not pay Social Security taxes.
There’s no way around it, both the Windfall Elimination Provision and Government Pension Offset are poorly understood – not only by many financial advisors, but by some of the technicians at the Social Security Administration as well. When it’s time for you to file for Social Security benefits, you may need to fight for what’s rightfully yours. But if you want to win this fight, you’ll need to know the rules. You can start by reading this article: How Teacher’s Retirement and Social Security Benefits Work Together
3) An Explosion of Options
While you’re still working, the investment decisions for your salary deferrals are minimal. Your pension is set up and completely managed by someone else. The only investment decisions you have to make is if you participate in your 403B.
That changes when you retire. Most likely, you’ll have financial advisors and insurance agents lined up to pitch you their products if they know you’re thinking about retirement. I’m sure you’ll hear the word “annuity” more than once. You’ll likely be encouraged to take a the partial lump sum option (if available in your state). All of these choices can can be really confusing. After several years of having only a few investment options, when you retire you’ll literally have thousands of options.
How do you make sense out of it all?
The first step is to find a financial advisor that you can trust. Preferably, find an advisor who will offer his services to you on a fee basis (as opposed to commissions). It doesn’t eliminate all conflicts, but it takes care of a lot of them.
Properly coordinating the income stream from the teachers pension, savings in retirement accounts, and Social Security will take a serious plan.
Between the weird Social Security rules and the pension options, I’d be willing to step out on a limb and say that teachers need retirement planning even more than private sector employees.
I’d love to hear your thoughts. Do you think retirement planning is more difficult for teachers? Why?