Teachers, Your Pension Won’t Cut It: What you Need to Do Now

Teacher Pensions are a beautiful thing….if you meet a very distinct set of life circumstances. Teachers are paid less because of the pension that is offered. In fact, most teachers are encouraged not to worry about retirement or investing beyond the pension plan because it will pay out to them until death.

Vested or Bust

Similar to some 401k plans, teacher pensions are matched by the employer each month as you put money in. However, unlike 401k plans traditional teacher pension plans rely on a formula in order to receive benefits: years of service and salary at the time of retirement.

Many companies have vesting periods based on the number of years worked. For example, HisFI’s company matches his 401k contribution just like mine. Yet, the vesting process looks very different. For him, the first year of service is 20% vested, the second year 40% vested, third year 60% etc. For teachers, there is a set number of years you must work in the SAME place in order to be vested. It goes from 0-100%.

If you are lucky, it may be 5 years. However, most pension plans are vested only after 10 years of service in the SAME place. Not only are you vested after 10 years, but in order to receive full benefits at retirement, you must work anywhere from 20-30 years in the same place.

The major problem here is that teachers do not stay in the same place. Teachers are humans too and will move states or take a break from teaching and come back. Perhaps the most unfortunate reasoning for losing your full retirement would be a layoff. If you are laid off prior to being vested you will lose all employer contributions leaving teachers to scrape up their meager contributions and try to plan again for the future.

In a recent study done by Education Next that reviewed the pension plans and projections for schools in all 50 states; they found that the budgets rely on a high teacher turn over in order to keep the pension plan. Pensions are expensive and state projections are counting on early career teachers leaving. More than 50% of teachers do not receive ANY employer pension benefit and just 1 in 5 teachers will ever receive full pension benefits.

So while a pension may be advertised as an incentive to stay in the profession, behind closed doors states are counting on teacher burn out or teachers to move in another direction in as little as 5 years.

Locked in Contributions

So let’s say you do plan on staying in the profession at least 10 years, maybe even 30 in order to be fully vested and receive full benefits. If this is true, you still need to take additional steps for retirement because your contributions are limited.

The amount of money you can contribute is decided the day you are hired by the district. You are offered the retirement plan and within two weeks need to sign on deciding if you want to slowly increase your contributions from 5% as you age or if you want to remain consistent. Here is an example of the options for my pension plan. The only problem is that once you have chosen you cannot go back. Period.

This is a problem for many young teachers who are so overwhelmed with the responsibility of starting to teach up to 150 children that considering your retirement, which seems so far away, is not at the forefront of concerns.

If you chose 5% knowing you needed every dime possible in your own checking account instead of an option of increasing over time- you will miss out on a larger more stable pension and you will need to supplement.

What you need to do now!

If you are like me and will not be in the teaching profession for your whole life, or you are a living breathing human who may need to move school districts or may be laid off, it is time to open up n additional retirement account or two.

In addition to the pension, teachers are offered two additional pre-tax retirement accounts. Some districts do a great job of making sure teachers know about this, while others may not even have a 457b set up for their employees (but they have too- so you can help them with this if needed).

Step 1: Contact your District to Inquire about Options

Log into your district portal or go down to benefits and ask what additional retirement plans they offer.

They should point you to a 403b and a 457b.

The accounts may not hold this label, as my 457b is called a DCP (Deferred Compensation Plan) and a 403b is often referred to as a TDA. However, if you mention a 403b and 457b they should have informational packets, options for investing companies and if they contribute to them.

Most districts do not offer additional contributions and this will be coming out of your paycheck pre-tax.

Once you get the information- start the vetting process. You need to keep an eye on the fees as many of these companies will charge outrageous fees.

Step 2: Decide How Much You Can/Want to Contribute

Look at your expenses, student loan payments, travel goals, and most importantly years to retirement.

Decide how much you can contribute each month to one or both accounts.

The max amount you can contribute to each account is $18500 this year-equaling to about $1450 per paycheck.

As teachers, I know this is sometimes not possible. For most teachers, this is certainly not possible to fund both accounts. For my first year, I opened a 403b and put in$75 a month. I was making around $2225 after taxes and that was all I could afford and still live- so no judgment or pressure.

Ok, there is some pressure because there is nothing more valuable than the power of compounding interest. Start now- even if a small amount and then each time you move a pay lane or receive a cost of living raise- adjust the amount going into your retirement accounts.

Step 3: 403b vs. 457b

Once you know how much you can/want to contribute it is time to decide which account is best for you and your goals.

403b

• • This is also called a Tax Sheltered Annuity Plan or Tax Deferred Annuity Plan (TSA and TDA).

• • Available to employees working for an organization that is categorized as 501 (c)(3) and certain ministers

• • Earnings on these plans are not taxed until distributed

• • Contributions can be elective deferrals (directly out of your paycheck)

• • You will receive penalties if making a withdrawal prior to 59.5

• • Allows for “Catch Up” contributions if you are 50 or older

• Can be matched by employers

457b

• • This is also called a Deferred Compensation Plan

• • Available to employees whose organization is listed under IRC 501 (c)

• • Can be amended for Roth contributions or rolled over into a designated Roth Account

• • Earnings are not taxed until distributed

• • Allows for “Catch Up” contributions if you are 50 or older

• Does NOT charge an early withdrawal penalty

Since we are on the path to FIRE, my goals align more with the 457b. I can pull money from this account without penalties and early. Thus, I will be working on filling this account up first. Then, and only after it is maxed will I contribute to the 403b plan.

If your employer will match your contributions to the 403b plan and you are not going to withdraw from your retirement early, then this would be a better option for your goals.

Lastly, it is important I mention that you can always open up an account outside of the district such as a Roth IRA. However, in this case, you will be putting funds in post-tax. This is the last option for me in terms of investing because I want to take advantage of no penalties and pre-tax accounts.

Benefits to Pre-Tax Retirement Accounts

By putting money into a pre-tax retirement account you are reducing your total taxable income today. This means it is “cheaper” to be putting money into these accounts. You save whatever your tax rate is.

It also lowers your adjusted gross income. This means you may qualify for things you otherwise would not such as health care subsidies etc.

Step 4: Enroll, Choose your Investments and Set Up Automatic Contributions

Once you pick the account, you will have some personal choices to make.

If you chose the 403b you will need to choose the company you want to open the account with from your employer approved list. We prefer Vanguard or Fidelity. I chose Vanguard because it had the Index Fund I wanted to invest in. For more on the Index funds we recommend going here.

If you can choose the option to pick your own funds (not have them do it for you) be sure to check the fees associated with the fund. You do not want to choose a fund that has high expense ratios- basically high fees. A good benchmark is the VTSAX at .04%.

If you chose the 457b you will most likely be given two options- to do a “One Step” fund meaning have the company choose your investments portfolio OR you can Build and Monitor your own investments. I recommend that you choose Build and Monitor and pick Index funds with low expense ratios. I chose to do 80% in US Large Cap Equity index Funds and 20% in Global Equity Index Fund.

Make the contribution amount you picked in Step 2 automatic and if you can have it come right out of your paycheck before you even see the money.

Step 5: Track your Net-worth

What is the point of putting all that money away if you cannot feel at least a little bit like a baller and watch your net worth climb. I used to use Personal Capital, but it got a bit glitchy on my phone so I have recently switched to Mint and love it.

Keep an eye on your investments and feel good that you have truly “adulted”. Share your knowledge with other co-workers! Many of my co-workers did not think about their other options or were hesitant to get started, but once I had done it I was able to share and help them set up their future as well.

Do not rely on your pension for the future. In today’s world individuals rarely stay at the same job for enough time in order for this to be where you put all of your hope for retirement. Banking on a pension is dangerous for your future and having a few other investment accounts means you are able to diversify your investments and ensure a more stable future.