Teachers and others who work in education have some unique opportunities
and challenges when it comes to planning for retirement, so that's what
we're going to talk about in the next couple of minutes here.
We'll go over those retirement savings plans that are available, discuss
some important pros and cons there, we'll go over pension plans[guaranteed
income for life], and we will also discuss how Social Security might be
affected if you don't pay into the Social Security system. We'll start with
what your school district might call defined contribution plans, and these
are the ones where you choose how much goes in. So you select
an amount that comes out of your paycheck, there may also be an
obligatory amount that goes in, but you primarily choose how much is going
to go in there, and that affects your ultimate retirement benefit when you
stop working. You also typically choose the investments, so you select whether
you want to be on the high end of the risk spectrum or
the low end or somewhere middle of the road. So you have a
lot of choice and control over that, and finally, in many cases,
you can choose to contribute on a pre tax basis and reduce your
taxable income, or you can do the Roth afte tax contributions,
and that allows you to pre pay your taxes so that ideally,
if you meet all IRS requirements later, you don't have to pay income
taxes when you take that money out. And in fact, for many new
teachers, making Roth contributions might be a good idea because in your
early years, you might be in your lower earning years, and that would
be expected to improve over time. In most systems, your options are the
403 plan. A 401k, or a 457b, and you might have access to
several of these, or maybe even all of them, depending on your school
district. So which one is best? Well, how do you figure that out?
It's smart to compare costs, so look at the investment costs,
look at other costs that might be inside of those accounts,
and in some cases, it's not always true, but in a lot of
cases, those older 403b plans can sometimes be expensive, so you really
want to look at especially if it's an insurance product what kind of
costs are inside of that and can you possibly do better if you
look at the 457 or the 401k, for example? You would also want
to just look at the features available in each type of plan.
So what are the investments available? Are they the types of things you
want to put your money into, Is there going to be an early
withdrawal penalty if you take money out, for example? A 457b typically
would not have that, so that could be appealing for those who want
to retire before age 59.5. There may be some benefits to pulling money
out of that early. It's important to know about surrender charges,
so again, if it is an insurance product, you want to know if
that money needs to stay in there for a certain number of years
or if you'll have to pay extra as you pull those funds out.
You would also want to know about catch up contribution, so most of
these allow you to contribute more after age 50, but the 403B and
the 457 might have an additional catch up contribution available, so that
can allow you to sock away some extra money if you're getting near
the end of your working years. Now, just a friendly reminder that this
is just a short video, so I can't tell you everything you need
to know, I hope you'll do a lot more research and maybe speak
with a professional, certainly with a tax expert and tax preparer so that
you can get all of the information you need to make the right
decisions. So now let's get into those defined benefit plans. These provide
an income for the rest of your life after you stop working,
and it's typically dependent on how long you've worked for that organization
and how much you earned, so it might be a handful of years
at the end of your career or your highest earning years.
Those are the things that impact your ultimate benefit with this type of
plan, so you don't have to select investments, and it doesn't matter how
your investments perform, that's all for the pension provider to deal with.
It's your years and your income that add up. Now you are typically
funding this or you're helping to fund it, because they will often take
some money out of your pay to put the assets together that are
eventually going to create your retirement paycheck. These plans can be
simultaneously very simple because it's pretty easy: You just make a decision
and stop working and get your income. And at the same time,
they can be kind of complicated because you may not completely understand
what's going on behind the scenes. So I would suggest just contact your
human resources department, the benefits department, they often have representatives
who are very helpful and very eager to help you figure out how
exactly the pension plan is going to work for you, so how much
income you might get... What are the different options you can choose for
beneficiaries, for example, if you want the income to continue going to
somebody after your death? So you can have, let's say, a spouse or
partner who continues to receive 100% of what you were receiving if you
die first, and that way they're not without an income after you die.
Or you can choose to have them get 50%
of that, for example, they're just a variety of choices, and there are
trade offs for that because if you give them the full amount,
then your monthly amount is going to be a little bit lower,
but on the other hand, you know that they will be reasonably well
taken care of because that income continues. Social Security can also get
quite complicated. So if your school district does not pay into the Social
Security system than any Social Security, you get might be affected,
so that can get kind of complicated. If you used to work in
the private sector and you did contribute to Social Security for a number
of years, or if you're going to take a spousal benefit from somebody
who has Social Security income, these are where you really want to check
with your benefits department. Just a couple of things to be aware of
here: First is the Windfall Elimination Provision, and this can reduce your
Social Security benefit by up to half of your pension amount,
so you take your pension amount, cut it in half, and that's how
much they might reduce your Social Security by up to a maximum of
$480, and that number can change over time. But this can be a
reduction in the amount you get and losing $500 a month can be
significant when you're in retirement. The Windfall Elimination Provision
has some complicated rules though, so if you satisfy certain requirements,
there won't be any reduction when there otherwise might have been.
So these are things, again, where you want to look at your situation
very carefully, go through the Social Security rules and speak with your
system, your retirement system, and figure out whether or not you might
be affected. There is also the Government Pension Offset,
and this would apply to benefits that you're going to get on a
spouse's record, so that's on your own Social Security work record,
but if you are going to take a spousal benefit, let's say one
half of your spouse's retirement income, or even a survivor benefit,
the amount you get from Social Security might be reduced by up to
two thirds of your pension amount. So that can again be a significant
reduction. Remember that this does just apply to those who do not pay
into the Social Security system for whatever pension you're getting from
a school system. If you've found this helpful, please leave a quick thumbs
up. That gives me feedback that you would enjoy more information like this.
Thanks and take care!