What are the Retirement Challenges for Texas Teachers?
Despite the importance of teachers in Texas educating, mentoring, and nurturing our children, we are not preparing them enough for retirement. A recent 2020 poll showed that 77% of Texans have trust and confidence in our state’s teachers, which is 16 percentage points higher than the national average.1 Unfortunately, this poll found that Texas teachers are undervalued.
With such a challenging and demanding profession that does not pay very well and provides increasingly poorer employee benefits, what can teachers do to reach their retirement goals? In this blog post, I discuss three of the most important challenges for Teachers to retire in Texas. I also provide some advice on how to meet these challenges.
No Social Security. This is a major issue for Texas public school teachers, where the vast majority of school districts do not pay into Social Security, which is the major program that funds the retirement of most Americans. So if your only full-time job was a teacher and you did not pay into Social Security, you will not get a benefit.
This major challenge can be addressed by deferring a percent of your salary into a defined contribution plan such as a 403(b) if your district offers one. Sadly not all teachers are aware of 403(b) plans, and many do not adequately fund them. Or don't get any advice on how much they should contribute each paycheck.
In addition, some of the providers have costly products, as seen by variable annuities that lock the participant into contracted investments that provide poor performance and meager returns. Teachers also get very little advice on what is an appropriate investment to choose from. This is not just a Texas problem, as there have been many stories written about how teachers are taken advantage of by insurance companies.
Inadequate TRS pension. There are, of course, benefits of having a defined benefit pension plan. Essentially, with TRS, you pay into the system, and you get a benefit based on your final salary and years of service to determine your monthly pension benefit.
TRS is generally a better-funded pension compared to other state plans. There is talk about underfunding of the pension, but I do not see this as a major issue. There have been recent changes that have secured a better future for TRS. But these changes provide a significant disadvantage to teachers that are new to the system as the burden will fall mostly on them to keep the pension adequately funded.
TRS does have several issues; one is that it is not indexed for inflation like Social Security. This is a major problem since you benefit loses purchasing power over time. The cost of things goes up, but your monthly pension remains the same. This lack of cost of living adjustment compounds over time, and your purchasing power gets worse, especially in this period of higher inflation.
What to do about this is to make sure you save money beyond your pension contribution towards retirement. As I mentioned, a 403(b) is a good option. But you could also open a Roth account and contribute towards this. The message is clear, TRS will fund a portion of your retirement, but it is good to be prepared and save money beyond this pension plan.
TRS favors long service and higher salaries. As with most pensions, TRS favors those that work more years and have higher salaries. For teachers that switch from another profession to being a teacher, the TRS system provides greater benefit for longer-tenured workers because of the current benefit formula. This is especially difficult for someone that wants to change their career. It is, as we know, difficult to attract new teachers, this makes it decidedly worse.
If you, as a teacher, do not want to become an administrator, your salary is essentially capped at a certain point. There are very few, or consistent pay raises for Texas teachers. This has a direct impact on the monthly benefit that you get in retirement. In fact, teachers in Texas tend to retire early and start taking the pension benefit because of the lack of increase in the monthly pension beyond some point in their career.
How to address these challenges. There are simple ways you can do to better position yourself for retirement. One is to save beyond TRS into a 403(b), traditional IRA, or Roth account. You can save up to $19,500 into a 403(b) and $6,500 if you are under 50 years of age in 2021. In addition, saving for retirement can reduce your taxes in the future with the Roth or deferring taxes until later when you might be in a lower tax bracket in retirement.
Schools districts in Texas are finally recognizing the importance of saving beyond TRS and are providing many good retirement savings options for their employees. If your school district does not offer a 403(b) plan, be sure to ask HR to provide one. Be careful of high-priced insurance companies that offer annuity products. Be sure to talk to a financial planner and start to prepare for your retirement today!
*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 to avoid 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 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.