The principal is walking into your classroom for an unannounced observation, your students are “spirited” today, and your lesson plans are overdue. Is this the time to think about retirement planning? You bet it is! A teacher can spend every waking minute undertaking the many tasks of teaching and never be totally finished, so it’s easy to put off preparing for retirement. However, the sooner you start, the better chance you have of enjoying a comfortable retirement instead of just getting by. Everyone, from brand-new teachers to veterans looking to retire in the next few years, can take steps to help realize a more secure financial future. Here are some things to consider.
1. Your pension, by itself, may not be enough.
All states administer pension plans that provide retirement income for teachers with enough years of service to be eligible for a pension (known as vesting in the plan).
Less than half of all teachers (44.5%) actually meet the requirements to vest in their states’ pension plans. Many teachers lose out because they change districts, move to other states, or leave the profession. Vesting rules can be complicated, and they vary by state and sometimes by district, so it’s critically important to make sure you understand the vesting rules for your pension plan.
However, while pension income is an important part of your retirement plan, it may not do more than cover basic living expenses such as rent, utilities, and healthcare. Plus, state governments can make changes to pension benefits to cut their costs, so the amount of pension income you’re expecting to receive isn’t guaranteed. For example, retired teachers in New Jersey once received an annual cost-of-living adjustment to their pensions to keep up with inflation. That part of the plan was eliminated when legislation froze pension payments in 2011.1
2. Retirement could last longer than you think.
If you stop working at age 60, you could enjoy 20, 30, or more years of retirement. No one can know the future, but some people fear outliving their money, and a healthy retirement investment account can help allay such fears.
3. Women may need to save more for retirement.
According to the National Center for Health Statistics, women, on average, live about 4.9 years longer than men, so they may need to save more for retirement. At the same time, some women can expect less pension income than their male colleagues because they took leaves from work to care for family and thus have fewer years of service.
4. Everyone can start saving for retirement regardless of age or budget.
Even if you have a pension or can contribute to Social Security, financial planners advise that funds for expenditures that add enjoyment to life, like hobbies, travel, and so forth, should come from other retirement investments, like a 403(b) retirement plan account. A 403(b) plan includes a wide range of investment choices, from guaranteed rate accounts to stock mutual funds. While starting salaries for new teachers are not overly generous, a 403(b) plan can be opened and maintained for as little as a $25 monthly contribution. Once you get in the habit of investing in your future, you will probably find that you don’t miss the money you are putting away, and you may be able to periodically increase the amount you save each month.
A 403(b) plan can also be advantageous for experienced teachers closer to retirement age. In 2017, the IRS began permitting maximum annual contributions of $18,000 to 403(b) plans. Teachers age 50 or older who are closer to retirement may be eligible to invest an additional $6,000 annually.
5. You don’t have to be a millionaire to benefit from the tax code.
A 403(b) investment account can have several tax advantages. First, the federal government doesn’t tax the income you invest until you withdraw it during retirement. For example, if you earn $50,000 per year and invest $3,000 in a 403(b) plan, you would only pay federal tax on $47,000 in income. Better yet, federal taxes are deferred on investment income generated by the plan investments, so your money has the potential to grow faster. You will pay federal taxes on all funds you withdraw at retirement, but you may find that your tax rate is lower after you retire, so there is a potential advantage there as well. The tax code is complicated, so you should consult your tax adviser to see how a 403(b) plan will affect your federal taxes.
Source: Katie Lobosco, “New Jersey retirees won't get pension increases,” CNN Money, June 9, 2016, http://money.cnn.com/2016/06/09/retirement/nj-pension-fund-cola/index.html