Retirement Planning For Teachers & Educators: A Guide

As a teacher, you always give 100 percent. You put in long-hours, work on the weekends and contribute the extra effort needed to get every student involved and excited about what they’re learning.  On top of it all, you are now being asked to either restructure how you teach, virtually, or possibly even risk being exposed to a life threatening virus if you are in a physical classroom. You really do give everything.

But when it comes to preparing for retirement, it’s not unlikely for teachers to put off the important decisions or neglect to ask questions. Educators face unique financial concerns when it comes to their retirement, but that doesn’t mean they deserve anything less than a relaxing and well-funded retirement. Below are the top three concerns we see educators face when it comes to their retirement - and what you can do to face them head on.

Understanding Your 403(b) Plan

At a surface level, a 403(b) plan works similarly to a 401(k). Money is withdrawn from a teacher’s paycheck pre-tax and grows in a retirement savings account until retirement.

But a major difference is that a 403(b) plan is typically a tax-sheltered annuity (although nowadays they often offer some mutual funds as well).  Similar to a 401(k), funds placed in a 403(b) plan aren’t taxed until withdrawn, and employers can choose to make matching contributions.

It’s important to note that, unlike a 401(k) plan, investment options for a 403(b) are limited to annuities and mutual funds.

When selecting a 403(b) plan from your employer, you’ll likely be presented with low, medium and high-risk plan options - or a mix of the three. It’s not uncommon for teachers to have questions about the differences between these options, and you will likely benefit from working with a financial professional to take a look at your options as well. Choosing the wrong option for your unique retirement needs could greatly impact your future withdrawals.

The Realities of Your Pension Plan

Approximately 91 percent of teachers are enrolled in a defined benefits pension plan.¹ While this is an opportunity few professionals are offered anymore, the realities of what your payouts may look like in retirement shouldn’t be ignored.

Remember that just because you are enrolled in a pension plan upon employment, does not mean you will meet the vesting requirements. For a majority of states, the requirement is five-years of employment, while some require ten. If you leave before this time, you will not be eligible to receive your pension payouts.

Additionally, how much you receive in retirement through your pension will depend on a variety of factors, including your salary and years of service. You’ll want to read the fine print of your plan and ask around to determine how much you could expect to receive from your pension plan in retirement. This can help determine how much you’ll still need to save in order to maintain your standard of living and cover expenses in retirement.

Social Security Benefits (Or Lack Thereof)

Did you know that not all teachers will be eligible to receive Social Security benefits in retirement? Approximately 40 percent of K-12 teachers do not pay Social Security taxes, and therefore will not receive Social Security benefits in retirement.²

This accounts for about a million educators in 15 states including:²

• Alaska
• California
• Colorado
• Connecticut
• Georgia
• Illinois
• Kentucky
• Louisiana
• Maine
• Massachusetts
• Missouri
• Nevada
• Ohio
• Rhode Island
• Texas

For millions of retirees, Social Security offers a steady, reliable income source in retirement. While it is not meant to cover all expenses, it can help serve as the foundation of a secure retirement plan. If you are a teacher in a state that does not have you pay into Social Security, it’s important to prepare a plan that can help you address this lack of income in retirement.

Preparing for retirement as a teacher can come with its own unique challenges, but that doesn’t mean it should be put off or ignored altogether. Working alongside your school’s human resources department and your own financial advisor can help you feel confident and comfortable with your plan for retirement. Because you give your all today, it’s imperative that you let your money care for you when you need it most.

A Note of Caution on Where, as an Educator, You Get Your Advice

It is an unfortunate reality, but all too often, we see many restrictions placed within 403(b) plan investments.  Sadly, this often comes at the guidance of a financial advisor who claims to specialize in working with educators.  Educators are good people by nature as they share the common DNA of genuinely wanting to help others.  But this quality characteristic also comes with a tendency to be overly trusting of others who may not always place your best interest before their own.  It should be noted that many, if not most, financial consultants who work with educators, teachers, faculty, or other staff, be it within the #LAUSD, #USC, #UCLA, or other systems, often do so on a commissionable basis.  The way commissions generally (but not always) work have to do with time and tradeoffs.  Think of it this way; the less access you have to your 403(b) account investments for a longer period of time, likely equates to a larger commission to the advisor.  Or put another way, the more benefits you pay for, often under the guise of riders or guarantees you may not even need, and often at a cost you don't see, also likely equates to a larger commission to the advisor.  In fact, the advisor may only have an insurance license, which by rule only provides access to one tool in the toolbox, insurance products like annuities, some of which pay higher commissions than others.  This also means that you may not even be working with an "advisor" but rather with an insurance "agent."  

Being an insurance agent doesn't make them bad people, as it is an admirable need and career.  But if, as a smart consumer, you want to be educated and informed, the way you educate others, you should better understand the role and license(s) of the advisor(s) you choose.  Learn about all of your available choices, not just those that benefit others. Doing so may help prevent your retirement life savings in your 403(b) be relegated to a single long-term annuity you can barely access with little flexibility when you want the most flexibility in your life - retirement.  

Final Thoughts

Ideally, be sure you are working with an advisor who operates in a fiduciary role and #fee-based role, in a best-case scenario, one who is a #CERTIFIED FINANCIAL PLANNING professional.  And please, do your own due diligence on your advisor, rather than merely taking the word of your co-worker who tells you that their person is really "nice." Because when you are retired, neither of them will likely be there. And how nice they were in the past won't help you in the future. And if you have any questions, please feel free to reach out. 

By Christian Cordoba
 CERTIFIED FINANCIAL PLANNER™
& Founder of California Retirement Advisors

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