Teachers work long and hard to educate and enlighten young minds. While the pay is arguably inadequate for the work they put in, teachers often reap the benefits of their career choice in retirement. They often have attractive retirement benefits, but setting yourself up to maximize them, both while you’re working and after you’ve stopped, is critical.
Here’s what you need to know about how teachers can retire well.
Before You Retire — Know Your Plans
Understanding the retirement plans offered by your school or district is the first step toward planning for your retirement.
403(b) Plans
Teachers typically do not have a 401(k) plan at work, like those who work for corporations may have. Instead, they may have a 403(b), which is similar. This is a defined contribution plan, which means that the amount of money you end up with when you retire depends on how much you contribute to the plan — and the market performance of those funds.
You can have money deducted from your paycheck to be contributed to your 403(b) plan. If yours is a regular 403(b), the money will be deducted before you pay taxes on it. When you retire, you’ll pay regular income tax on the withdrawals. If it’s a Roth 403(b), you will contribute after-tax dollars, but your withdrawals in retirement will be tax-free.
Your employer may match your contributions, up to a certain limit, but this is not as common with 403(b) plans as it is with 401(k) plans. If your employer does make matching contributions, be sure to contribute at least enough to get the maximum matching contribution — this is free money.
There is a limit to how much you can contribute to a 403(b) plan. In 2022, that limit is $20,500, plus a “catch-up” contribution of an additional $6,500 if you are over 50 years old. In 2023, you will be able to contribute $22,500, plus $7,500 if you’re over 50.
457(b) Plans
Public school districts may offer a 457(b) plan in addition to or in place of a 403(b) plan. A 457(b) behaves similarly to a 403(b), in that your contributions are deducted from your pay. But with a 457(b) there’s no early withdrawal penalty if you’ve left your job.
Contribution limits for 457(b) plans are the same as they are for 403(b) plans, but you can contribute the maximum to both plans. So if you have both, use them.
Pension Plans
Teachers, unlike most employees in the private sector, still get pensions in many cases. A pension is a defined benefit plan, meaning that the amount of money you will get out of the plan is fixed, based on your age, salary and tenure as a teacher. Every state has different rules, so consult the website of your state’s Teachers’ Retirement System for details.
You don’t make contributions to your pension plan — it’s paid for by your state. Most pension plans are set up to replace a certain percentage of your pre-retirement income for the rest of your life. The amount of income will depend on how long you teach, how old you are and what your salary is when you retire.
At Retirement
When you are approaching retirement, you’ll need to determine how to fund your lifestyle. This can get a little complicated, especially if you have a pension, a defined contribution plan, and if you and/or your spouse qualify for Social Security.
It may be a good idea to get some professional advice from a financial advisor before making any decisions that could impact your cash flow for the rest of your life. Before you do that, though, here are some things you should know.
Choose The Best Pension Option
Once you retire from teaching, if you have a defined benefit plan, you’ll need to make a decision about how to receive your pension. Typically, you have three options.
You can receive a monthly payment for your lifetime. Or, you can receive a smaller payment for your lifetime and your spouse receives 50% of that amount after you die, should your spouse outlive you. Or, you can receive an even smaller payment for your lifetime and your spouse receives 66% of that amount after you die. These percentages may vary, so check your specific plan for details.
Pension Maximization
There are a lot of factors to consider when choosing a pension option. Will your spouse receive a large Social Security benefit or pension payment of their own? Do you have other retirement savings? Is there a large age difference between you and your spouse? Do health issues make it likely that one of you will die long before the other? What about family history of longevity?
That’s a lot of what-ifs and, without a crystal ball, there’s no easy answer. But there is a strategy that may work to ensure the best use of your pension funds. It’s called pension maximization, and here’s how it works.
Figure out how much more money you’ll get if you take the 100% single-life option for your pension. Subtract the amount you’d get if you took the 50% spousal option. This is how much more money you’ll get every month if you take your pension just for your life than if you take it for your life and then your spouse gets 50% for the rest of their life. Spend no more — and hopefully less — than this amount to purchase a permanent life insurance policy on yourself.
The result is that you get a larger pension amount every month while you both are alive. If you predecease your spouse, they get the death benefit from your insurance policy.
Pension Maximization Example
Here’s an example. Jane Teacher has these options for her pension. She can take $1,200 a month for her lifetime. She can take $1,000 a month for her lifetime and her husband Joe gets $500 a month after she dies. Or she can take $900 a month for her lifetime, and then Joe gets $600 a month for the rest of his life after she dies.
Jane could take the $1,200 a month single life pension and spend $300 a month on a life insurance policy that would pay out when she dies. If Joe is still living, that would provide him with money to live on in lieu of the pension. If Joe predeceases Jane, she could cash in the life insurance policy.
A couple of things have to align for this to work. First, Jane must be able to get a life insurance policy. This means she needs to be young and healthy enough to qualify. Second, she must be able to purchase a policy sufficient to provide for Joe, at a premium that is less than the difference between her pension options.
A financial advisor can help run the numbers to determine if this scenario makes sense for you.
Understand Social Security
As a teacher, if you have a defined benefit plan and/or a defined contribution plan, you may not be eligible for Social Security benefits. Here’s how you know: if you pay into Social Security, you should be able to collect it after you retire. If you don’t pay in, you can’t collect. Whether you pay into — and can therefore collect — Social Security depends on the state you teach in. If you teach in more than one state, check the rules for each state.
That seems easy enough, but it doesn’t end there. Some teachers have side or summer jobs to augment their income, so they may pay into Social Security at those jobs. To qualify, you must have worked at least 40 quarters at a job through which you paid into Social Security.
If you are married, you may be eligible for Social Security benefits on your spouse’s work record. But if you have a pension, some or all of your spousal benefit may be offset by the Government Pension Offset. This is a provision designed to prevent “double dipping” — collecting on both the teacher’s pension benefit and the spouse’s Social Security benefit.
Here’s how the Government Pension Offset works. The spousal Social Security benefit is reduced by two-thirds of the teacher’s pension amount. For example, Teacher Joe gets a pension of $450 per month. Joe’s wife Jane collects Social Security of $1,200 per month, which means Joe is entitled to a spousal Social Security benefit of $600 — half of Jane’s. But this is offset by two-thirds of Joe’s pension, or $300. So Joe gets $300 — half of Jane’s Social Security less the offset — in spousal Social Security benefits, plus his $450 pension.
After You Retire
No matter how well you plan before retirement, you may have to take some measures to ensure a viable income after you retire.
Working in Retirement
Many teachers work part-time after they retire. There are many options to do this, including substitute teaching, tutoring or working as a corporate trainer. Keep in mind that if you are collecting Social Security and have not yet reached your full retirement age (FRA), your Social Security will be reduced by $1 for every $2 you earn over $19,560.
Final Take
Again, don’t hesitate to get help to navigate the maze that is a teacher’s retirement plan. Understanding your choices and maximizing your options can help you enjoy your retirement from teaching.
