What’s the easiest way to turn $1,000 into $1 million?
If you invest $1,000 in the stock market and earn an average 10% return, you only have to invest $150 a month. In 40 years, you will have over a million dollars in your accounts.
How much money would you have to invest monthly for only 10 years to accomplish the same feat? A budget-busting $4900 a month. Imagine trying to do that on a teacher’s salary!
The money you can earn from compounding interest, plus time to spread out your contributions make a huge difference in retirement planning for everyone.
However, teachers are in a different sort of situation. Because of this, early retirement planning is even more critical for them to enjoy their golden years.
Let’s break it down.
Is Social Security Your Safety Net?
Many people figure they don’t need to worry too much about saving money for retirement. After all, Social Security will start sending them a check once they’re eligible. They’ll always have that safety net to fall back on.
But many teachers don’t have that luxury.
Some states do not participate in the Social Security program for their public employees which includes teachers. About 40% of teachers don’t pay into Social Security and thus will not be eligible for benefits upon retirement.
If you have just assumed that you will get Social Security, you may want to find out.
Government Pension Offset
Even teachers who know they won’t get Social Security might assume they can still enjoy rider benefits from their spouse who does pay into the program. This is true, but due to government pension offset rules, you might not get as much as you would expect.
In general, these rules mean the Social Security benefits you receive will be reduced by ⅔ of the amount of your pension. In other words, if your pension is $600 per month, your Social Security check is reduced by $400, ⅔ of your pension amount.
Many teachers have been in for a rough surprise at retirement because they don’t know about these offset rules. This is another reason to talk to a financial advisor — and early. Not only will they let you know about this potential reduction, but also they can help you plan your savings accordingly.
Teacher Pension Plans
Even though many states do not participate in Social Security for their teachers, they do provide a different sort of public pension plan. These plans vary widely by state and it’s worth it to pay close attention. There are certain things you can do to maximize your benefits, especially if you talk with an advisor early.
But don’t rest easy just yet. Though pension plans are widely available, only about 44.5% of teachers become vested in them. This means that they meet all the requirements (such as years of service) to be eligible for benefits under the state’s plan.
If you do become vested, the received amount often just barely covers basic living expenses. Plus, there is no way to how much you’ll actually receive in retirement. Your state government can make changes to the plans at any time which will negatively affect what you receive.
Of course, there’s a benefit to not paying into Social Security — you get less money deducted out of each paycheck. You can put this money towards your own retirement accounts.
The 403(b) Plan
Most people are familiar with the option of contributing to a 401(k) plan. For teachers and health care workers, the 403(b) plan is their available option.
Like the 401(k), teachers work with their employers to set up the plan and the money is automatically deducted from their paycheck pre-taxes. This reduces your taxable earnings and you’ll pay less in taxes each year as a result. Plus, you can’t spend your retirement money on something else if it never lands in your hands!
You are limited in how much you can contribute to these plans. In 2022, the limit is $20,500.
In some cases, employers will make a matching contribution up to a certain percentage of your salary. This is essentially free money and another reason why you should think about retirement planning ASAP. The earlier you start participating, the more years you can receive this benefit.
The 457(b) Plan
If you work for a public school, you may also have the option of investing in a 457(b) plan. It works basically the same as a 403(b) plan, but employer matching is uncommon.
The plan is also limited to $10,500 per year, but here’s the perk. You are eligible to contribute to both plans. So if you max out your 403(b) contributions, the 457(b) plan is a great way to take advantage of tax benefits on more of your money.
However, with both these plans, you need to be conscious of the fees. Some providers charge so many fees that the benefit almost isn’t worth it. The main thing is to carefully read the fine print before investing and talk with a financial advisor when you find yourself confused.
How Much You Need for a Comfortable Retirement
We’ve touched a little on what you can and can’t count on as far as benefits in retirement. We’ve also described a little about your savings options.
But how much money do you need to be saving?
Well, the answer varies for everyone. It depends on many factors such as your lifestyle and the expenses associated with it, travel plans, and healthcare costs.
Some of these factors, such as healthcare costs, are a big question mark. This can make retirement planning feel vague and confusing.
However, one thing is for sure — the earlier you begin planning and saving, the easier the entire process will be. It’s one thing to leisurely save for retirement over 30 or 40 years and an entirely different idea to cram it into 5 or 10 years.
Are you looking for the best retirement planning services? My Federal Plan is dedicated to helping you maximize benefits and retire with peace of mind. Our network of licensed agents and registered investment advisors are trained specialists in retirement planning for education, state, and Municipal government employees. Schedule your FREE consultation today!