Retirement plans for teachers are not as simple or as clear cut as they used to be. The days when everybody that taught in a public school got a good and fairly straightforward pension are over. Instead there are a variety of retirement options available some of which are better than ever.
The first step every teacher needs to take in retirement planning is to find out what kind of retirement plan your school system offers. Such plans vary widely from state to state and from system to system. Once this is done you can begin your retirement planning.
Be very careful when getting advice from union officials or your school system’s human resources personnel. There is a strong possibility that such people may not understand retirement planning and the complex issues involved. That means you have to consult a certified retirement planner to get an honest picture of your retirement situation.
Teachers’ Pension Plans
Most teachers will be covered by a basic pension plan or defined-benefit plan. Under this system you would receive a monthly payment from the school system or a plan that it contributes to. The payment will usually be a percentage of your salary. The plan is usually funded by contributions from the school and deductions from your salary.
The big drawback to this kind of plan is that the payment may not be enough for you to live on in retirement. If you receive a large school pension your Social Security payments could be reduced. Under the Windfall Elimination Formula popularly known as the Double Dipper Rule, your Social Security payments can be reduced if no Social Security taxes are taken out of your salary.
Most people who have this kind of plan will need to augment it with savings and investments. Something else to be aware of is that many teacher’s pension plans are under funded and to make matters worse such plans are not guaranteed by the federal government. That means some teachers could lose their pension benefits at some point.
Other Retirement Options for Teachers
What makes teachers’ retirement so confusing is the variety of plans and benefits available to education professionals. In addition to pension plans many teachers have access to 401K Plans and Individual Retirement Accounts.
These are tax deferred investment plans which allow you to invest part of your retirement money in other vehicles including stocks and annuities. Such plans can be risky but they have higher returns and money kept in one can be written off your income taxes. A big drawback to 401k and IRA plans is that most people under 59½ years old will have to pay a 10% tax penalty on funds withdrawn from one.
Many public school teachers have access to a really good deal called a Tax Sheltered Annuity (TSA) or 403(b) plan. A TSA can be a really good deal because there is no penalty on funds withdrawn. TSAs offer the same investment options as IRAs yet they can provide a source of regular income for those who are retired. The only taxes due on contributions are Social Security and Medicare. Since it is an annuity a TSA is insured so it is less risky. Anybody that has a TSA should definitely take advantage of it.
Those without TSAs can get some of the advantages by purchasing a deferred annuity contract. This comes with more costs and penalties but it can allow you to save up an unlimited amount of tax deferred income.