This summer, I was tasked with overhauling Retirement Homeroom, a National Life website dedicated to helping Educators and School District Employees plan for retirement. Like any project, I started with an open mind, gathering as much knowledge as I could and putting myself in the shoes of those we seek to help: Teachers. I found myself back in the classrooms of my favorite teachers, reflecting on their contributions to who I am – and where I am – today. I thought about the relentless “one-paper-every-weekend” assignment in Mr. Hayes’ AP English Class: I mastered the art of the m-dash. I left more prepared for college than I ever imagined. I became a writer.
Through my research, I was overcome by a bout of anxiety: Did Mr. Hayes state pension cover him in retirement? Was HE prepared? How can it be that, in the U.S., 46% of a teacher’s retirement income will come from personal savings (1), such as a 403(b) retirement plan or annuity?
In fact, many teachers rely on their state-funded pensions to fully fund retirement; in reality, these pensions may account for less than they expect. On average, states only have 69% of the assets needed to fund the promised pension benefits (2), which may result in some states needing to modify their pension programs to reduce future benefits.
While I can’t fix the pension system, I can pass along what I’ve learned about retirement for educators and specifically, 403(b)s, thanks in part to the writing skills Mr. Hayes taught me:
- A 403(b) can help to close your income gap in retirement. A retirement income gap is the difference between the income you had on your last day before retirement and your actual retirement income. The challenge is that your state pension and Social Security may only replace 40% – 70% of your income, leaving you with a gap to fill. Rather than use personal savings or take on part-time work to close this gap, a 403(b) can play that role.
- 403(b)s are retirement plans designed specifically for public school employees. They work alongside your pension, helping to fill your income gap. Typically, 403(b) contributions are made pre-tax and grow tax-deferred while in the plan; taxes are only paid when money is taken out of the plan.
- You can easily “set it and forget it” with contributions pulled directly from your paycheck. With a 403(b), contributions are directly pulled from your paycheck, making it easy to contribute to your retirement nest egg on a regular basis. You can always change the amount of your contributions.
- A 403(b) is portable, giving you control over your retirement savings. One of the key benefits of a 403(b) is that you have complete control of it, even if switching to a different school district. The portability feature allows you transfer your savings to other employer plans or into a traditional IRA if you leave your job. Or, if you prefer, you can leave your account in place and any balance has the potential to continue growing tax deferred.
- 403(b) plans are flexible – Most allow you to change products within the plan that best match your risk profile. There are several options for savings vehicles within 403(b)s, which may include:
• Mutual funds, allowing access to professionally managed portfolios of equities, bonds and other securities.
• Annuities that allow you to accumulate savings before retirement and convert these savings to guaranteed income during retirement.
For more lessons on retirement – and to find out the grade your state’s pension received – check out Retirement Homeroom. We think the web site deserves an A… And hopefully you agree!
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(1) The State of Retirement: Grading America’s Public Pension Plans, Urban Institute, May 2014
(2) The Pew Charitable Trusts, The State Pension Funding Gap 2017, 06/2019, https://www.pewtrusts.org/-/media/assets/2019/06/statepensionfundinggap.pdf