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Teachers' Retirement Options
by Paige Estigarribia
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If you're a teacher, your retirement options are a little different than most people. You may have pensions and retirement plans that are only available to teachers. To help us understand teachers' retirement options, we reached out to Dave Grant, a CFP who specializes specifically in retirement planning for teachers. Here are his thoughts:
Q: When should teachers consider their retirement options?
Dave: Planning for retirement should be something you do as soon as you start your career. In doing this, you are able to take small steps towards saving, which can have a big impact by the time you retire.
However, teachers should be looking at seriously reviewing their pension credit, their saving strategies for retirement, and how they want to approach retirement about five years before they plan to do so. There are some key things to do in the final year before retirement if done wrong, these can cost teachers money.
Q: What are the typical options that teachers have available?
Dave: Options for teachers vary depending on which state they happen to work. Some teachers will have a pension provided to them; others will have the option to take a lump sum from their pension, while others can do a mixture of the two. Deciding on what option is best requires careful planning because the decision cannot be reversed.
Q: Are there other options teachers may not know about or may forget about when thinking about retirement investing?
Dave: One thing I see teachers do is put all of their retirement savings into a 403(b) or tax-sheltered annuity (TSA). While it currently saves on income taxes, these taxes will be due when money is withdrawn during retirement. For teachers who receive a pension, they don't have any income tax flexibility to save themselves on taxes. For this reason, I suggest that my clients split their savings between tax-deferred, Roth, and taxable accounts. This gives teachers the most flexibility when they are in retirement. It may make their taxes slightly higher now, but can provide much needed flexibility later in life.
Q: If a teacher is invested in one plan, but wants to change to a different one, are the typical retirement options available to teachers easy to roll into different retirement plans?
Dave: It's easy for teachers to fall out of love with their 403(b) provider! For teachers investing in a 403(b), they can switch vendors and use a different 403(b) provider. Some companies will charge a fee to move from their platform, but if you move to one that offers better investment choices, that fee may be recuperated pretty quickly. However, you have to be careful which vendor you choose.
This option to switch plans is not available for pension plans. Teachers are stuck with the pension plan of the state in which they teach.
Q: What is the one thing you wish more teachers would think about when they are considering retirement?
Dave: I wish teachers would plan ahead, sooner. For example, teachers in various states (including Illinois where I live) are being told that their pensions will change. Some teachers are relying on this pension as their sole source of retirement income. If they had thought about retirement earlier and saved accordingly, they would be in a much stronger position by having other funds to use.
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Searching out different options for retirement can be confusing, and even more so for teachers, who have additional options. Hopefully these tips will help teachers who might be contemplating their own retirement options and financial planning.
Dave Grant, CFP®, is the founder of Finance for Teachers, a fee-only financial planning firm in Cary, IL. Dave exclusively serves teachers in Illinois by helping them to organize their financial lives and live a fulfilled life. He is also the founder of the Finance for Teachers Network, a group of advisors across the country who focus on helping teachers plan their financial future. Dave is a columnist at Financial Planning magazine, and a writer for various financial technology companies.
Paige Estigarribia is a writer for The Dollar Stretcher who enjoys writing about food, frugal living, and money-saving tips. Visit Paige on Google+.
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