Retirement Plan - Teacher

[eisor]

Ok. I am in college to be a teacher and I will be graduating May 2008. I will begin teaching Fall 2008.

Currently I don't have any retirement savings. I know I need to start, but as of right now it just isn't feasible. I currently work in an office that really doesn't have any benefits (none...really!). I am actually employed by a staffing company. I'm pretty sure the staffing company offers a 401k, but it does not match anything.

I've always been told that teachers have great retirement plans and what not, but never really been given any details. I tried to do some research but I'm not sure I'm understanding what I'm reading.

I found this site:

Teachers Retirement System of Georgia

From what I understand, I have two options. The DC or DB (TRS plan). The DC is very similar to a 401k. It's riskier. The DB (TRS plan) basically is guaranteed retirement. It has options within the plan regarding death & beneficiaries.

I'm still very confused how the DB plan works. I've been reading a lot of the articles on the TRSGA site, but I'm still having difficulty understanding it.

Are there any teachers out there that might be able to explain it to me simply? Do I do the formula they give and then increase it by 2%? If that is the case, then I estimate I'll have ~$1.8M in retirement. Is that right?

Here is my math:
$60,000 - estimated highest average annual salary
x 30 - years worked
x 1.2 - 2% multiplier
= $1,803,600



Also, I've been told that you only have to contribute to social security for 7 years in order to benefit from it. Does anyone know if this is true? I also know that a lot of school districts do not participate in Social Security. I've been contributing to SS for 6 years already. Next year will be my 7th. So, if the above is true, then I'd also be able to get SS when I retire (that is of course if it is still around). I'm definitely not counting on this though. I was just wondering if what I heard was true.

Ok. I just found this article:

LA Times Article

Seems to break things down pretty well. But, it says you have to work in the private sector for 20 years. And, it also says that there is a "windfall elimination provision," which will decrease the SS benefits an ex-government employee can receive. Anyone know anything about this?



Lastly, should I also contribute to a IRA or ROTH IRA when I begin teaching? (I really can't start any sooner.) Or, will my retirement as a teacher be sufficient? I really don't understand the teacher retirement that well, so I guess that is why I'm asking this question.

Basically, any guidance, advice, articles, websites, etc. you can give me to help me research/understand this stuff would be greatly appreciated!

Thanks!

[Fern]

I am not a teacher, but DC and DB plans are not restricted to teachers.

Once upon a time, many, many workers had DB (defined benefit) plans. This is essentially a pension to which your employer contributes for you. This is golden, but for obvious reasons, there are fewer and fewer DB plans around. (Think IBM a long time ago.)

Now, the majority of employers offer DC (defined contribution) plans, which are either 401k (corporate America) or 403b (schools and non-profits) plans. In this scenario, YOU, not your employer, makes the contributions and your employer may or may not match your contributions up toa certain point. DC plans shift the responsiblity for your retirement onto the employee, unlike traditional plan plans.

I have never heard of an employer giving you a choice between DC and DB plans. They offer what they have and that's that.

[Fern]

As far as SS goes, they base what they will pay you in retirement on the average of what you earned in your 30 peak (highest) earning years. If you only worked, say, 20 years, your SS payments will be quite low becus they will take the average of 30 years, which includes those 10 years you didn't work. (This is all spelled out in that annual statement you receive from SS.) So i guess all i'm saying is that as far as your SS payments go, you will be penalized if say, you take a few years off to raise your kids, you get laid off and don't go back to work right away or if you want to retire early. If you get less than 30 years in, your average SS payments will be accordingly be lower.

As far as an IRA, yes, definitely contribute every year to a Roth IRA. Who knows if your retirement plan at work will be sufficient. Most people rely on a combination of personal savings, 401k or 403b plan, IRAs and SS to pay their expenses in retirement. To assume that you need only 1 of those is not a good idea. Most experts say you'll need around a million dollars to live comfortably in retirement, more if you have expensive hobbies like travel. If you contribute faithfully each year to that IRA PLUS contribute to some sort of tax-deferred plan at work, reaching that million dollar mark will be a lot less painful, maybe not painful at all if you are disciplined and consistent over time.

[eisor]

I didn't realize DB & DC were general terms and not directly related to education. That is good to know!

I understand that with the DB my retirement money is basically given to me as long as I fulfill the years of service. But, with DC, I have to contribute to it. So, basically I'd be contributing my own money for my retirement and letting it earn money from there.

So, what is an average return on a 401k or 403b? Is 10% a good estimate?


So, if my original calculations were correct, I'd get ~$1.8M with the DB plan.

If I were to do the DB (403b), I'd have to contribute $8,000 a year for the next 33 years, in order to reach that same amount (based on a 10% return). I used this calculator:

Bloomberg.com: Calculators

So, which is better? With the DB, I'm basically given the money. So, it seems that that would be a better option. The DC requires I put money into it.

I'm not seeing any benefits of the DC plan? Would one be that you could contribute more money, meaning you could end up with more for retirement than if you did the DB plan?

Am I missing anything? There has to be some other benefits of the DC plan.

[eisor]

Originally Posted by Fern

As far as SS goes, they base what they will pay you in retirement on the average of what you earned in your 30 peak (highest) earning years. If you only worked, say, 20 years, your SS payments will be quite low becus they will take the average of 30 years, which includes those 10 years you didn't work. (This is all spelled out in that annual statement you receive from SS.) So i guess all i'm saying is that as far as your SS payments go, you will be penalized if say, you take a few years off to raise your kids, you get laid off and don't go back to work right away or if you want to retire early. If you get less than 30 years in, your average SS payments will be accordingly be lower.

Yeah! I read that in that article I posted. Make sense! It said that they count those years as $0 income but they are averaged in!

I'm honestly not expected SS to be around when I'm old enough to get it. I'll have to work another 13 years after I retire from teaching in order to qualify for benefits. So I won't be able to qualify until I'm 65. I'm definitely not counting on it!!

[humandraydel]

Let me try to clarify. The page you link to about Georgia's Teacher Retirement System (TRS) is just informing you of the 2 common types of plans - defined contribution and defined benefit. It goes on to say that Georgia's TRS is a DB plan. You are not given the option. At the bottom of the page there is a link to "Educate Yourself" about the plan. Click on that and it will take you to another page which provides more details. I've included two important points below:


All members of TRS currently contribute 5% of earnable compensation* to TRS by payroll deduction.

In addition to your contributions, your employer also contributes to TRS. The employer contribution rate is 9.28% of the member's earnable compensation.

[Like2Plan]

Originally Posted by eisor

O
I found this site:

Teachers Retirement System of Georgia

From what I understand, I have two options. The DC or DB (TRS plan). The DC is very similar to a 401k. It's riskier. The DB (TRS plan) basically is guaranteed retirement. It has options within the plan regarding death & beneficiaries.

I'm still very confused how the DB plan works. I've been reading a lot of the articles on the TRSGA site, but I'm still having difficulty understanding it.

Are there any teachers out there that might be able to explain it to me simply? Do I do the formula they give and then increase it by 2%? If that is the case, then I estimate I'll have ~$1.8M in retirement. Is that right?

Here is my math:
$60,000 - estimated highest average annual salary
x 30 - years worked
x 1.2 - 2% multiplier
= $1,803,600

eisor,
I am not in the TRSGA DB plan, but I believe what they are getting at is they will pay you a percentage of your highest average salaray (averaged over two years) at the rate of 2% per year you have worked.

So, let's say your highest annual salary is 60K and you work for 30 yrs. That would be 30 yrs X 2% per year X 60K. You would be earning 36K per year in retirement. (Is your pension indexed with inflation, too? I would imagine it is--it looks to be a good plan).
It looks like a very good retirement plan. I have not seen too many pensions which just take the highest two years--it is not uncommon to see a pension which use the highest 5 years or 3 years in the calculation.. (Highest two years is awesome. )

Link to the TRSGA pension calculator.

[all4money]

I'm not familiar with GA schools, but I actually work in the NC school system and am in charge of the finance/benefits area... The DB - defined benefits -teachers retirement system here works like this. All full-time eligible employees are REQUIRED to put in 6% of gross pay each month. That's an automatic payroll deduction from everyone's checks no matter what. Then the state "matches" that with 7.83% (for 07-08). The match rate can and does change each year. There are different scenarios that can play out at the time of retirement, but the "norm" is that after 30 years of service, you can retire with full benefits based on your 4 consecutive highest earning salaries... I won't go into boring specifics... just trying to give you an idea of how we do it. Now, we on top of this mandatory defined benefits plan, we do offer employees the option to supplement their retirement by contributing to a 401K, 403(b) and 457 plans. We stress highly to teachers that the retirement system, although wonderful to have, will most likely not cover their standard of living at retirement... they will need supplemental income... AND most teachers get in their 30 years of service way before the age of social security kicks in so they've got to either find a part-time job or have additional retirement income somewhere.

So, my suggestion to you is to definitely learn as much as you can right now at the start of your career. Contact your state's retirement system office. Meet with those that know about the details of how to maximize the GA retirement system... ask lots of questions. Based on a previous poster's observation, it looks like GA might have the same "mandatory" retirement contribution stipulation like we do but please do look into something else as well, whether IRAs or whatever. Retirement might seem like a long way off but if you don't start now with the habit of contributing at least something to a supplementary retirement account, you will not have enough down the road.

[eisor]

Thank you all!

I'm really a novice when it comes to retirement stuff!

This is one thing they don't teach you in college. And, it is one of the most important!

I'm definitely understanding it a LOT more.

Thanks again!

[Joan.of.the.Arch]

There is an article in Wikipedia which explains defined benefit and defined contribution systems, as well as hybrid systems. It's short and well written.

These are the states whose teachers cannot participate in Social Security: Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas. I think that means that you will also be eligible to draw Social Security if you retire from Georgia.

I read a story about a man who had worked most of his teaching years in Arkansas and so was participating in SS, but he worked his last few years in Missouri, retiring under their system and thus found that he was either (sorry I forge which of these--) not eligible or to draw SS, or could only draw 1/3 what his benefits would have been based on his participation all those previous years and also paying into SS through parttime and summer work....The moral for you is: if you move to another state to teach even many years after teaching in GA, make sure you understand how that might affect not only your teacher's retirement, but your social security.

Another thing to keep in mind is that there may be other benefits with retirement, chiefly participation in insurance plans. For some public employment retirees, those benefits are re-negotiated every year along with employee negotiations. So you have to be aware that any insurance benefits you retire with may change significantly later down the road. That could be hard to plan for and is one of the reasons why I think you also need to invest beyond just the teachers retirement plan and social security.

Whacha gonna teach?! What level? Are you excited about it?

[eisor]

Thanks! Good to know about the SS stuff. I think next summer I'm going to set up a meeting with the TRSG and figure things out.

I'm going to teach Business Education at the high school level. And, I'm super super excited! I've been ready to graduate from college for a long time now. A lot of what I've learned in my business technology classes I've already known. So, I haven't been too challenged the last couple semesters. I'm just ready to get into the classroom. Aside from the no paycheck thing, I'm really looking forward to student teaching in the spring.

I'm sure my blog will be an interesting read during that time. My DH and I are saving up now, so we will be able to live 4 months without my paycheck (I'm currently making more than he is!).

[rob62521]

I'm a teacher in Illinois and our retirement benefits are based on how many years we taught and an average of the last four years of our salary. We then get a percentage of our salary. The easiest way to figure it out is to multiply 2.2 by how many years you've taught to give you the percentage of your salary.

You will need to find other retirement options besides your TRS. I have a Roth IRA as well as a 403b plan. I have been putting money in the 403b plan for about 18 years so I will have additional funds besides my teacher's retirement.

I'm glad someone commented that many states do not allow teachers to draw social security. Illinois is one of them.

When you are hired as a full-time teacher and decide if that's the district you wish to remain in, check out the contract and see what you have to do to get additional raises. In my district you get a raise if you have your master's and then again if you have 32 hours beyond your master's. So, with each year you go up a step and I've gone up and over with a master's and 32 hours. Each district's contract is different.

Best wishes on a long and happy teaching career!

[TBH]

Just another vote for contributing to your own retirement account (ROTH IRA, probably) in addition to your fabulous plan at work. If the state's retirement system has problems, you'll sleep a lot better at night knowing you have your own savings too.

I would start out contributing the mandatory 5% to the DB plan. If you can max out your Roth in addition, that's great. If you can't, start with perhaps another 5% of your take-home pay to your Roth IRA, and increase your Roth contributions every year by a percentage point or two when you get your cost of living increases.

I think it's funny that you're thinking so carefully about this one year ahead. I'm the same way. You are going to be all set to start saving for retirement the second you get that job, aren't you.

[eisor]

TBH - I'm definitely a planner. I had my whole 4 year college plan set in place before I even started my freshman year. I like to know what is coming so that I'm not rushing to make a decision.

Thanks everyone for the responses!

[Fred333]

It is good to have a plan, but just remember life is full of surprises which means you need to be flexible.

[eisor]

Oh. I definitely know about surprises! My long term plans aren't 100%. It's just an idea of what is to come. My 4 year plan definitely has NOT gone according to that original plan. It's just nice to be informed before it is time to make a decision.

[rob62521]

Last night we were meeting with our financial advisor. He said that in Illinois there are going to be changes made with 403bs. Right now, teachers can choose a company they want to invest with and the company takes care of the investing. He said legislation is stating that school districts in Illinois will be required to offer 403bs to teachers and the districts will then be in charge of the investing. There will no longer be a choice of where teachers put their money. No money will be matched either. He said the way it is written, teachers can sue the district if poor investments are made. Is this stupid or what????? Why would lawmakers want to force this on both districts and teachers and when so many are already strapped because of expenses, make it so they can be sued? I realize they probably want to make sure good financial decisions are made, but why force this? This is supposed to take effect in 2009.