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The Changing Face of Retirement – Considerations for Educators

Fifth Third Bank


There are countless stories of how a dedicated teacher inspired a student to go on to achieve amazing things in life or proved instrumental in nudging a student back on the right track. A comfortable retirement after years of providing such real, tangible, and essential benefits to the community should not be too much to ask. Like many of us, however, education professionals face opportunities and challenges when saving for retirement.

Retirement savings opportunities for educators

These will vary by state and sometimes by district or even institution. Here are some of the more common options and issues.

Defined benefit pension plans

A defined benefit plan is what most of us would envision when hearing the term “pension.” These plans traditionally offer a monthly annuity payment based on a formula, which—while varying state-by-state and even district-by-district—is often a combination of years of service and your compensation.

Some pension plans may require teachers to contribute. Typically, options for taking your pension upon retirement include several annuity formulas. For example, some single-life annuity monthly payments will continue for the remainder of the retiree’s life but then cease upon their death. Joint and survivor options offer a continuation of benefits for a surviving spouse or other beneficiary, should the retiree die first.

Pension plans are very costly, and some states are modifying the level of benefits for new and younger teachers as a result. A typical modification is to increase the number of years required before new teachers are vested in a benefit.

Defined contribution plans

The most well-known defined contribution plan is the 401(k), which is extremely common in the private sector. Under a defined contribution plan your ultimate retirement benefit is determined by the amount you contribute, as well as any employer matches and your investment results. These plans place the responsibility for savings strategizing on the shoulders of the employee, rather than the employer.

For educators, however, the most common type of defined contribution plan is the 403(b). These plans sometimes come in for well-deserved criticism: The underlying fees in this type of 403(b) plan can drastically cut into the amount you are able to accumulate for your retirement. The PBS Frontline Program “The Retirement Gamble” profiled some of these high-cost annuity-based plans.

The underlying fees in this type of 403(b) plan can drastically cut into the amount you are able to accumulate for your retirement.

Other districts may offer 403(b) plans with greater choices for investments, including mutual funds and a selection of advisory custodians. In this case, it is wise to do your research and perhaps consult with an independent financial professional to help guide your ultimate decision.

Your employer may or may not match your contributions. If they do, be sure to contribute at least enough to receive the full matching amount.

In some cases—California, for example—teachers have access to a 457 plan in addition to their 403(b) plans. A 457 is similar to a 403(b), but there are some differences in terms of withdrawals. With a 403(b), withdrawals prior to age 59 ½ are subject to a 10% penalty if you are still employed. You can take penalty-free distributions if you have already retired after age 55.

With a 457 plan, your distributions are not subject to the 10% penalty if taken after termination of employment, hardship, death or disability regardless of age.

One important note: You are eligible to contribute the maximum of $18,000 plus catch-up contributions to both plans if you can afford to do so. These opportunities are rare beyond California, but it can pay to make yourself aware of all retirement savings opportunities offered by your state or school district.

Social Security issues

As a retired teacher, the question of whether or not you will be eligible for Social Security benefits and a pension is a complicated one.

The first issue is whether or not you’ve paid into Social Security over the course of your working career, and if so, to what extent. Generally, everyone needs 40 quarters of compensation of at least $1,300 to qualify for the benefit. This can be satisfied even from part-time jobs during high school and college or other jobs during summers off from teaching, depending upon the amount earned.

In some school districts, the pension benefit is already integrated with Social Security. For those in the 15 states with independent pension plans, however, the process may prove more confusing: Even if you do qualify for Social Security, the Windfall Elimination Provision (WEP) limits the total amount you can collect from government pensions in total, eliminating “double dipping.”

Like WEP, the Government Pension Offset (GPO) places limits on the amount of a Social Security survivor’s benefit that you may be eligible for under your spouse’s Social Security earnings record if you collect a teacher’s or other governmental pension.

Consulting with a financial professional who is knowledgeable about both your teacher’s pension and Social Security eligibility can be a wise move as you prepare for retirement.

State fiscal issues

Today, a growing number of states and municipalities—including the city of Detroit as well as the states of Illinois and New Jersey—are in the news over financial solvency issues. Your pension is generally considered an obligation of your state, but rules can vary and you will need to stay on top of any developments here if your district/state are impacted by these issues.

Financial planning considerations

Like anyone preparing for retirement, there are any number of unique financial planning issues facing teachers. Here are few to consider:

Choosing from among several retirement plan options, if applicable. Your district may offer several options in addition to a pension. These might include several options for your 403(b) or others. You will want to evaluate the various options before deciding how to proceed here.

Integrating your benefits with a spouse, if applicable. Whether both you and your spouse are educators or not, there may be some choices and trade-offs—for example, whose defined contribution should you focus on if you can’t afford to max both plans out? Additionally, decisions surrounding how to take your pension(s) might come into play: If either, or both, of you have the option to take a lump-sum and roll that amount to an IRA, you might consider doing that for one pension and annuitizing the other.

Planning for health care costs. You will want to fully understand any retiree medical benefits available to you, including low-cost insurance or Medicare supplements. If your district offers a high deductible health insurance plan with an HSA option you might consider this as a vehicle to save for retirement health care costs—i.e. defer money to the HSA and ideally cover out-of-pocket medical costs from other sources while working. The HSA money could then be used tax-free in retirement to cover Medicare and other eligible health care expenses once you retire. This is a critical issue as the cost of health care in retirement is a major expense that is often overlooked.

Choosing how to take your pension benefits if several options are offered. There may be several joint and survivor options for taking a monthly annuity from your pension—or, perhaps, a lump-sum option. Deciding which option is right for you can be complicated.

Teachers offer knowledge and guidance to their students every day. An experienced financial professional can repay that favor on behalf of the rest of us by helping educators determine how to best to utilize their retirement plan options. Really, it’s the least we could do.