Pitfalls to Avoid For Teachers Retirement
Teachers should try to avoid three common pitfalls when it comes to their retirement. The good news is that there are easy solutions to fix these pitfalls.
Pension Benefit Payouts
Pension plan payouts for teachers vary depending upon the teacher's length of service, their earnings history, and other specifics of the plan. The amount that the pension covers is generally far short of most teachers' financial needs in retirement. For 2016, the average yearly pension for newly retired teachers was around $20,000 in many states with some states being more generous.1 Typically, a pension could cover half or less of the teachers' salary in retirement.
This low payout is especially problematic for those teachers that have less tenure with the first 20 years offers very little payout and much more generous payout after 30 or more years. Therefore, pension benefits are very generous for full career teachers but shortchange short and medium-term teachers. This is not great news for those teachers that start their teaching career later on in life.
The problems of both low payouts and shortchanging career changers are a real concern. As a result, a teacher needs to save money in addition to their pension plan into what we discuss below through either a 403(b) and/or Individual Retirement Account (IRA).
Be Careful with 403(b) Plans
As mentioned, one solution to low pension payouts is for the teacher to save money in a defined-contribution plan for teachers — the 403(b) plan.2 Closely resembling the 401(k) plans of the private sector, a 403(b) plan lets you have money deducted from your paycheck and put it into investments you choose from selected companies and funds.
Your contributions are generally tax-deductible and your investment earnings are tax-deferred. You pay tax on that money only when you make withdrawals in retirement. But if you prefer to pay the taxes now instead of when you retire, and if your employer offers the option, you can contribute to a Roth 403(b) plan.
Although 403(b) plans are great options for teachers, there is one big downside—the investment choices can be limited or expensive. Teachers must often select from a confusing number of options. Besides, choices are often overloaded with insurance products like annuities and variable annuities which typically have low returns and expensive fees and surrender charges.3
With annuities, there are of course benefits with the protection of the teachers’ principal so they don’t lose the money. But the investments offered can be significantly overpriced when compared to a 401(k).4
Make sure you talk to a financial advisor about your investment options for the 403(b) plan. You want to go with low expense funds, perhaps index funds. With an IRA, you can also open and fund on your own at an online broker. With an IRA, you can contribute up to $6,000 in 2020, with an extra $1,000 if you are 50 or older.
No Social Security?
Amazingly, about 40% of public school teachers aren’t covered by Social Security! In 15 states, at least some educational employers do not participate in Social Security, so their teachers neither contribute to the program and as a result, do not get any of its benefits. In 12 of those—Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, and Texas—few if any public school educators are covered.5 In Texas, 96% of districts do not pay into Social Security.
This is a major problem if you were depending upon Social Security to fund your retirement like most folks. It is wise to check your paycheck whether you contribute to Social Security. You don’t want to be shocked and expect this in retirement when you are not even eligible.
The solution here is simply is to invest more in your 403(b) plan or IRA to make up for this shortfall. If possible, investing 10% of your salary into these plans will greatly supplement your pension and perhaps provide for a more comfortable retirement.
Be aware of these three pitfalls. Always remember, it is never too late to save for retirement! Talk to a financial advisor today about what options will work best to create a retirement plan for you and your family.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.