Will a Teacher Pension Provide Enough for Retirement?
08 Jul - Posted at 16:18h in Pension Plan, Retirement Planning
If you are a teacher, you probably have plenty of questions about your pension plan. Most notably: will a pension provide enough for retirement, or will you need additional investment strategies?
At Appreciation Financial, the team of retirement and pension experts understand that a retirement strategy is not a “one-size-fits-all” approach, and what may work for one person might not be the solution for someone else.
This article details teachers' pension plans, along with additional investment options for educators to supplement their retirement funds.
What is a pension?
Simply stated, a pension is a retirement plan that requires both the employee and employer to set aside funds for the employee's future retirement.
There are two types of pension plans: defined-benefit and defined-contribution.
Most teachers' pensions are defined-benefit plans. But as we will explore later in this article, many educators are choosing to supplement their pension with a defined-contribution plan as well.
What does defined-benefit mean?
Under a defined-benefit plan, the employer guarantees the employee a set amount of income at the time of retirement. The defined amount is based on a formula, including:
- Years employed
- Final average salary
- Employer's multiplier
With a defined-benefit plan, the employer is liable to pay the employee's retirement, even if money runs short in the pension fund.
Will a pension provide enough for a teacher's retirement?
There are no easy answers to this question. That is because everyone's retirement situation is unique. That said, the best way to know if your pension will provide enough for you to retire is to have a clear picture of your retirement goals.
It is never too late to examine your retirement goals. Doing so will help you determine if your teacher's pension is enough to retire on or if you will need to implement additional investment strategies.
It does not matter whether you are new to the teaching profession or if you have been an educator for years, Appreciation Financial can help you set your retirement goals with retirement planning for teachers and free pension reviews.
Additional Investment Strategies for Teachers
After your pension review, you might find that your teacher's pension alone is not enough for the retirement of your dreams. And even if your pension review finds that it can provide you with the retirement you want, it cannot hurt to explore these additional investment strategies for teachers.
Eliminate debt
While not exactly an investment, eliminating outstanding debt is a crucial part of any investment strategy. High-interest rates on debt cut into the returns you make from other investments. Therefore, eliminating debt is a great starting point.
403(b) retirement plan
A 403(b) retirement plan is one of the easiest and most convenient ways for a teacher to diversify their portfolio.
A 403(b) retirement plan is similar to a 401(k). The 403(b) makes a great investment choice for teachers because the funds are tax-sheltered until withdrawn. To fund this type of plan, deductions are taken from your salary and often matched by your employer.
These plans are offered by many public school districts, as well as numerous nonprofit organizations and religious institutions.
403(b) retirement plans allow several types of contributions, including:
- Elective deferrals
- Employer contributions
- After-tax contributions
- Roth contributions
The combined maximum amount that employees and employers can contribute to a 403(b) plan is $58,000.
At the age of 59 ½ , teachers can access the money in their plan without penalty.
Best of all, 403(b) plans offer plenty of options in terms of payouts. You can choose monthly payments, a lump sum, and in some cases, you can roll your money over into another investment.
A combination of high and low-risk options
You have probably heard investors talking about diversified portfolios. But what does that mean and why is it important?
First, when sticking to pensions and 403(b) plans, an outside agency is investing the funds and what you put into those plans is guaranteed. Therefore, with these defined-benefit plans, there is little risk.
But many teachers want to explore other types of investments as well, some of which carry some risk.
Some low-risk options include:
- Savings accounts
- Money market mutual funds
- Bonds
Higher-risk options include stocks and real estate.
The best way to choose between these options is to create a portfolio where the risk matches your comfort level. Remember, what works for one person might not work for you.
Assessing risk and diversifying
Diversifying is a strategy that protects your money because it spreads the risks. Risk is essentially understanding that you might lose some money in hopes of greater returns. A diversified range of investments means holding a variety of financial assets.
Assess risk when examining your retirement timeline. If retirement is still decades away, you might be willing to take on more risk. But if you are only a few years from retirement age, you might not want the risk of volatile investments and instead, opt for more steady options.
Remember, you do not have to make investment choices alone. Our team of retirement experts at Appreciation Financial is there to guide you through difficult investment decisions, along with providing free pension reviews and retirement planning for teachers. Decisions regarding portfolio risk and diversification should never be made alone.
Get Support for Your Retirement Planning Needs
At Appreciation Financial, our expert retirement planners understand that teachers are busy people. We know that educating the nation's youth is essential, and the rigors of the job leave little time for retirement planning. If you’re unsure whether your teacher pension will be enough for retirement, let us help you!
Our financial team takes pride in providing retirement services for teachers, including free pension reviews, and helping you explore other investment options like the 401(b).
Call our office and request a retirement evaluation today or reach out to our team of financial advisors online.