Teachers are one of the most vital professions in our society. Teacher retirement planning is an essential part of any teacher’s life, but teachers who focus on their day-to-day teaching responsibilities overlook it. This post will aid you understand how to plan for your retirement as a teacher so that you maintain peace of mind and enjoy your golden years.
Overview of Teacher Retirement Planning
Being a teacher can be one of the utmost rewarding experiences in life. However, it is also an investment into your future that you should not take lightly. Find out what retirement plans are available to teachers and how these plans work so as to make decisions based on all factors involved with teaching before committing yourself fully.
If you are a teacher, the best place to get details about your retirement is from an advisor for your state’s retirement plan or HR office and/or union representative.
Defined Benefit Plan vs. Defined Contribution Plan
If you are searching for teaching in a public school, your retirement plan will most likely be a defined benefit plan (aka pension) managed by the state government.
If you are going to teach at a private or charter school, your retirement plan will be different. You may have a defined contribution plan.
What’s the difference? Well, as short and straightforward as possible, Both retirement plans involve contributions from both employer and employee while the person is employed and then payments from the plan once retired. But there are big differences between these retirement plans.
Pension – Defined Benefit Plan
With a pension plan, you receive a specific monthly payment for the remainder of your life once you retire. Employers often help employees save for retirement, typically by giving them a percentage of their wages put aside to invest.
This is called a defined benefit plan because once you have worked for it, your benefits are predetermined and should be considered vested. You can receive payments from that plan after retirement as long as the required number of years has been met to ensure longevity in your account balance. Many pensions have a survivor benefit that entitles your beneficiary, usually your spouse, to get the pension when you die.
The more you work, the more money you will receive. One obvious advantage of a pension is that it provides you with a benefit for the rest of your life after you retire. One disadvantage is that you do not qualify for the pension if you leave your job before achieving the necessary years of service.
However, this is not normally the case, as many pension plans have a way for you to transfer money from one retirement plan (usually its cash value) into another. One disadvantage of pensions is that accumulated balances are usually difficult or impossible to move if someone moves out of state and begins teaching there.
Retirement Account – Defined Contribution Plan
A defined contribution plan is retirement savings account that you and your employer contribute to while you work. The money in the account belongs to only one person when they retire, so it can be used for whatever they please.
Within these accounts, you choose how to invest the funds, and the interest/value from this investment is added to your account balance.
One advantage of these plans is that the account is yours from the start, and you keep access to it no matter how long you teach or where you go during your career. A disadvantage is that when you retire, your account will not have any more money. You will only have the money from the account to live on, and when it’s all gone, you won’t have anymore. The amount in the account changes over time. It depends on what happens to your investments.
This balance will rise or fall based on the economy and any investments you put these funds into.
Keep in mind that a few states are switching over to hybrid retirement plans for new teachers entering the workforce. Some retirement plans combine elements of traditional pensions (also called defined benefit plans) and 401k-style accounts (called defined contribution plans).
Know Your Social Security Options
If you’re unsure if your work qualifies for Social Security, a quick glance at the deductions on your paycheck should be able to clarify. You may also qualify for benefits without having worked in the private sector because it usually takes ten years of working with them before qualifying.
Government Pension Offset
If you are married and your spouse pays Social Security taxes, then they might be eligible for spousal benefits. However, if they also have a pension, their benefits could be reduced under government offset rules. Typically the Government will reduce two-thirds of the monthly amount from Social Security depending on income levels, with more reductions occurring at higher incomes.
Weigh Working After You Retire
You might not be able to want or afford to stop working after retiring from a full-time career as a teacher. In the US, teachers have not been getting more money for years. They make less than other college graduates. If you are going to teach part-time or work in another profession, instead of just teaching, think about how your income might affect what you can save now.
Types of Retirement
There are several different types of retirement accounts that you could claim your benefits from. This article explores the various options and when to retire with a summary of each type of account.
In retirement, you have a lot of different options:
If you are age 55 or over and leaving your job, it’s feasible to take your assistance before you reach your Normal Pension Age, which is age 65. Actuarially Adjusted Benefits (AAB) will be a smaller amount than your Normal Pension Age (NPA) because you’ll not yet have reached this age.
If you are presently employed, your employer must agree to let you retire and receive your benefits. If they initially say no, then you cannot withhold their consent for more than six months. You will get your benefits the day after you stop working.
Normal Age Retirement
You should claim your pension benefits once you reach the normal pension age (NPA). Provided that you are out of service, this will happen. If you work after the last day of your pensionable service, your benefits will be paid from that day.
If you delay making your claim, then the benefits will be backdated to when you last worked or reached Normal Pension Age, whichever is later. Both of these time periods are also subject to taxes, and any money owed in this manner will come with a lump sum payment instead as well.
Phased retirement is a new benefit that was introduced in 2007. It allows members who are reducing their earnings due to part-time work or reduced responsibilities the capability to withdraw some of their pension funds as an alternative source for income replacement.
The maximum you can withdraw from the Scheme is up to 75% of your benefits. The percentage that you choose will be put into payment for as long as it takes effect, starting on the first day following when your earnings have reduced. Under the Scheme, some benefits continue to grow as you work and contribute less.
If you’re over 55 and your employer decides to terminate your employment, they may grant you premature retirement. The determination to do so is up to the employer, but if granted, it means that part of the cost for benefits will be paid by them.
If granted a premature retirement, you will be given an actuarially adjusted pension from the Teachers’ Pension Scheme. And when you retire, your employer will pay the balance of what you would have received if you retired for age-related reasons. This is called mandatory compensation.
Finally, make sure you take all your benefits (either final salary or career average) at the same time.
Ill Health Retirement
If you are too ill to work during your teaching career, Ill-health retirement is an option that can be taken without the usual reduction applied to early retirements.
Final Salary Arrangement
If your NPA is 60, your final salary benefits are:
- A pension is calculated by multiplying the years you work with your average salary and then dividing by 80. and
- A total sum equal to three times your pension.
If your NPA is 65, here are the benefits:
- A pension is calculated by multiplying years of service by average salary and dividing that number by 60.
If you have had downtime in service, a hypothetical calculation will be performed.
Hypothetical calculations were introduced to protect the position of members who, after finishing sufficient service to qualify for retirement benefits, had a break in service and then at some point took up pensionable employment again.
Career Average Arrangement
The pensionable earnings are multiplied by 1/57 each year to create the average benefits. The amount is indexed and added up every year, which will eventually be your total pension number.
What is the Average Salary?
The average salary for your profession is used to calculate retirement benefits. It’s calculated by taking the better of:
- The average of your best three succeeding years’ worth of salary from ten years ago or,
- The last 12 months of your service before you retired.
If you retire at an average salary and have a final salary pension, your career earnings are used in the calculation of that benefit. If you are a teacher who stopped teaching for more than five years at any point after April 1, 2015, then the salary used in your retirement calculation will be the one in effect from when you stopped teaching.
If you do not have pensionable service on or after January 1, 2007, You will get the average of your salary from the last 365 days before you left your job.
Conversion of Pension to Lump Sum
Teachers who were in service before 2007 are entitled to a pension calculated as the greater of their final salary or three-quarters of the average salary for their best five years.
If you do not have service with a defined benefits plan, or if your last few years of employment before retirement did not contribute any pensionable salary, you will not receive an automatic lump sum when taking your benefits.
You can select to receive a lump sum rather than receiving a lifetime monthly pension. However, this will reduce the earnings you earn from your retirement plan.
The highest amount of lump sum that you can get is 25% of your total benefits.
What is my Normal Pension Age
If you have more than one pension arrangement, your Normal Pension Age is dependent on which pension arrangement or arrangements you are in.
If you are retiring and will continue to receive a pension, that pension’s percentage will be either 60 or 65, depending on when your first worked at the company.
If you were working before January 1, 2007, your final salary Normal Pension Age is 60 as long as you’ve not:
- Transferred the service out of the Scheme
- Had a repayment of contributions
- You had a break from service for more than five years ending after December 31, 2007.
If you join pensionable service on or after January 1, 2007, your final salary NPA will be 65.
Tapered Members & Transition Members
If you are transitioning or have a tapered membership, it is important to know that there will be benefits for both your career average and final salary arrangements. You will therefore have more than one National Pension Scheme (NPS) Account Number (NPA).
Teacher retirement is a topic that can be confusing at first glance. There are many different plans and calculations to consider, but it becomes much simpler once you try out a few. This blog post has given some tips on estimating the cost for your pension plan with just two simple equations.