How Teachers Can Save for Retirement

Many teachers - especially those in major metropolitan areas - are working second and even third jobs to make ends meet.

When it comes to ensuring a strong financial future, teachers need to take matters into their own hands.

That means:

Making the most of the income they have and taking advantage of every retirement option available.

Find out about the concrete steps that teachers can take to start planning and saving for their retirement.

Why Teachers Need to Plan for Retirement

Although many people assume that government workers like teachers are set for retirement, the reality is more complicated.

The truth is:

School-sponsored pensions aren’t a guarantee and only 20% of teachers end up getting the full pension amount because the barriers to eligibility are so high.

If a teacher is eligible for a state pension, it means they can’t pay into Social Security and won’t enjoy those benefits when they retire.

Since most Americans still rely on Social Security to pay for the majority of their expenses in retirement, this means teachers need to be even more cognizant of retirement planning and what options they have.

A teacher who doesn’t receive a full pension will have to fill in the gaps with their own retirement savings.

Many teachers also struggle financially, especially if their school district doesn’t give cost-of-living increases or associates salary increases with student performance.

Look:

While teacher unions are strong, it’s still an uphill battle for them to be compensated properly.

Because teachers are often underpaid, they need to be more diligent about saving for retirement.

The average annual teacher salary is $53,000 and a bachelor’s degree in education costs around $30,000 for an in-state student at a public university and $78,400 for an out-of-state student.

A master’s degree costs anywhere from $12,000 to $74,000 depending on the institution.

Some schools provide salary increases if a teacher gets his or her master’s degree, but those often fail to equal the amount spent on tuition.

All of these reasons are why teachers have to be as vigilant about their retirement savings as they are about their students’ futures.

In between grading tests and making lesson plans, they need to take time to set up retirement accounts and learn how to invest.

Understand Government Pensions

Some teachers have access to a pension through their school system, but this depends on where they live and how long they’ve been teaching.

The fact is:

Each state has its own rules about pensions, with most requiring that teachers work a certain number of years before qualifying.

Every state pension is run independently, and many are run poorly.

It’s not uncommon for pension plans to run out of money, meaning they can’t make payouts without raising taxes or cutting government funding.

It’s also important to consider the cost of pensions for recipients.

Teachers have to contribute part of their own salary toward their pension, and that money disappears if they leave before becoming eligible.

Researchers from the Urban Institute also found that teachers have to work 25 years on average in order to get more from the pension than they put in.

Teachers who leave before that time forfeit $22,000 on average.

Pensions are still a great retirement tool, but it takes a little foresight to get the most value.

Before leaving a position, teachers should consider how their long-term plans will be affected.

Every educator should know his or her state pension guidelines and be aware of how career decisions will impact their eligibility.

Max Out 403(b)s and 457(b)s

A 403(b) and a 457(b) are the equivalents of a 401k for teachers.

Like a 401k, teachers can contribute up to $18,500 a year and those 50 or older can add an extra $6,000 a year.

A 457(b) allows teachers to contribute double the annual limit for their final three years of employment.

In 2018, that would mean a contribution limit of $37,000.

A teacher has to choose between that limit or the extra $6,000 catch-up provision - they can’t do both.

Some schools may offer both a 457(b) and a 403(b). If that’s a possibility, both of those plans can be maxed out simultaneously.

If you’re having trouble hitting the max, consider limiting your spending and cutting out some expenses.

That may be easier said than done for teachers who are struggling to make ends meet, but even minor changes like canceling an online streaming subscription or carpooling to work can make a significant difference over time.

Open an IRA

Like any other employed individual, teachers have the opportunity to contribute to an Individual Retirement Account (IRA).

An IRA comes in two forms: traditional and Roth.

A traditional IRA lets investors deduct contributions on their taxes the year they contribute, but they’ll pay income tax on withdrawals in retirement.

A Roth IRA won’t save investors any money on their taxes in the short term, but withdrawals in retirement will be tax and penalty-free after age 59.5.

Those with a traditional IRA have to start taking distributions at age 70.5 or risk paying a 50% tax. Roth IRAs don’t have any required minimum withdrawals and can even be left behind in a will.

Traditional IRA Vs. Roth IRA

Traditional IRA Roth IRA
Contributions may be tax-deductible. Contributions are not tax-deductible.
Pay taxes upon withdrawal. Earnings can be withdrawn tax-free and without penalties if the funds were in the Roth IRA for 5 years and you've reached age 59 1/2.
You must be under age 70 1/2 to contribute. You can contribute at any age.
Required minimum distributions (RMDs) are required starting at age 70 1/2. No RMDs required.

Only individuals with a modified adjusted gross income (MAGI) of $137,000 and married couples filing jointly with a MAGI of $203,000 or less can contribute to a Roth IRA.

The annual contribution limit for IRAs is $6,000 for 2019, but that figure often changes at the beginning of the year to match inflation.

Anyone 50 or older can contribute an extra $1,000 a year.

Because IRAs can be opened outside of your employer, investors have more freedom on what funds to choose.

They can decide to invest their entire IRA in one stock or use a broad swatch of funds.

You can open and manage an IRA through an investment firm like Vanguard or Charles Schwab, but robo-advisors like Betterment and Wealthfront are also becoming increasingly popular with budget-conscious investors.

A robo-advisor is an algorithm that decides how to invest your retirement account based on your age, goals, and income.

Robo-advisors typically have low fees and low minimum investment amounts, so they’re ideal for someone who wants to save money and take a more passive approach to their portfolio.

Teachers who contribute to a 457(b) or a 403(b) can still open an IRA and contribute the maximum for each plan.

They can also decide to contribute some portion to a 457(b) or 403(b) and max out their IRA, since the latter allows better options for investments.

Find Your Own Financial Planner

As more and more teachers put in 60-hour workweeks, some set aside their own needs to take care of their students.

When they find the time to learn more about personal finance and investing, they often hire a financial advisor.

Now:

Schools often have financial advisors visit to give presentations about retirement planning, but they’re usually salesmen and not legitimate financial planners.

Instead of settling for the financial advisor who has a relationship with your school, find one on your own.

The National Association of Personal Financial Advisors has a list of financial planners who are fiduciaries, meaning they have an ethical obligation to only recommend products in your best interest.

A competent planner can give your financial situation a close look and provide actionable advice, like how much to save for retirement or which investments to pick.

They can examine your pension, 403(b), 457(b) and other retirement accounts to see if you’re properly diversified or if you need to branch out.

There is usually an upfront fee for a financial planner, but getting the insight of a professional is invaluable.

By allowing them to set you on the right track, you’ll end up recouping that money tenfold.

Start an Emergency Fund

An emergency fund isn’t a retirement account or specific to teachers, but it is a vital component for a comprehensive financial plan.

An emergency fund is a block of easily accessible money that you can use during a true catastrophe, like job layoffs, a major unexpected home repair or a car accident.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

Emergency funds should hold between 3 to 6 months worth of expenses and only be accessed when funds are truly tight.

Teachers should keep their emergency fund in a savings account where they can transfer it easily, but also where they won’t be tempted to dip in for anything other than an emergency.

A savings account separate from their everyday checking account is the ideal location for an emergency fund.

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