Recently, I had a conversation with a dear friend who happens to be a teacher. My friend is concerned about retirement. Feeling overwhelmed with all the options and opportunities to save for it, a request was made for a formal discussion about the subject matter.
Very often, various types of retirement saving vehicles are presented to teachers in a dedicated effort to make sure they are aware of their choices. However, at first glance this information can be downright confusing. So, I’d like to offer a simplistic explanation of ways teachers can save for their future.
Employer Sponsored Plans
Pension plans, aka Defined Benefit Plans, are employer sponsored savings plans for your retirement based on your salary and service. The lion’s share of the contribution is made by your employer.
For public school teachers in each state, your pension plans are set up and administered by the State’s Teachers’ Retirement System (TRS).Each state organization offers a different array of plans and benefits to its beneficiaries, which may include not only teachers but other public-education staffers.
Funding of TRS benefits largely depend on contributions from state governments. As with many public pensions, those contributions have been falling behind and creating significant funding shortfalls. To return the pension plans to financial health, states are turning to school districts to contribute more of a share of pension costs.
This fiscal crunch is also prompting some states and districts to mandate larger contributions by teachers to the cost of pensions. In other states, the pensions themselves are being eliminated or trimmed. With many pension plans in trouble, public school teachers are increasingly turning to additional ways to invest in their retirement.
For private school teachers, TIAA is one of the largest providers of retirement strategies for academia with many plans that grow tax-deferred until retirement. Some of these include Defined Contribution Plans – employer sponsored savings plans where the lion’s share of the contribution is made by you, i.e. 403b, 401k, and 457 plans.
IRAs
Otherwise known as individual retirement accounts, IRAs were established in the 1970s to help individuals gain more control in saving money for retirement. At most banks, IRAs can be opened as a regular savings accounts or a Certificate of Deposit. In many cases however, IRAs are set up as mutual fund account where you must decide, based on your risk tolerance, the type of mutual fund(s) that will best serve you. The very general choices are a cash fund, bond fund, or a stock fund. For the most part it will be a combination of the three.
IRAs come in two flavors, Traditional and Roth. The traditional IRA was the first of its kind and it was designed for owners to deposit money into the account on a yearly basis up to a certain amount ($6,000 for 2019) and allow it to grow tax deferred until retirement. Contributions are invested pre-tax and are tax deductible. Once you retire, distributions are taxed as income and after you attain the age of 70 ½, you are required to withdraw a certain amount from your traditional IRA and pay taxes on it by law. The Roth IRA (named for its chief legislative sponsor Senator William Roth of Delaware) pretty much works the same way as a traditional IRA with a few exceptions: contributions are invested after-tax and are not tax deductible, while distributions are tax free.
Please beware: withdrawals from IRAs (both traditional and Roth) are not available without penalty until age 59 ½ is attained. If an owner decides to take money out of their IRA before age 59 ½, it is considered an early distribution. As such, a severe penalty will be imposed by the IRS – income tax would have to be paid on the entire withdrawn amount and an additional 10 percent penalty of the amount would be assessed. This rule generally applies to any retirement account.
Annuities
An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return, obtain regular disbursements at some point in the future. The goal of the annuity is to provide a steady stream of income during retirement.
Whereas life insurance provides protection against the possibility of a person dying too soon, an annuity can provide protection against the possibility of a person living too long – that is to say, a person outliving his or her assets.
A taxed-deferred annuity can serve to supplement your retirement by allowing your contributions to grow without taxes imposed on the increase. Then, after several years, you either annuitize what’s in your account by getting steady income over a fixed period or you can take a lump sum distribution for the entire amount (although this could mean a hefty tax bill). In both cases, you will have something to add to your retirement pot.
So, teachers, while you prepare to provide invaluable instruction to your students this year, please remember to plan and prepare for your retirement in years to come with the same vigor and passion in which you educate.
-Carla Madison, EA
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