A Teacher’s Guide On How To Retire
If you are a teacher and consider retirement within the next five years, or you are currently retired, this article was written for you. Too often, we at BA Schrock Financial Group have noticed that teachers have been entering retirement unprepared and missing out on potential extra income. This article addresses your options with your pension, 403b, and Social Security. Though there is a lot more we could cover, like the Windfall Elimination Provision (see https://www.ssa.gov/pubs/EN-05-10045.pdf), but this article will focus on the big three that tend to affect teachers and their retirement.
The Pension
Most all teachers qualify for a pension. Most will take the pension without considering the Lump Sum or the partial lump sum (available for Ohio teachers). The Lump Sum gives you full access to those funds. Some benefits of the lump sum are the ability to be more proactive in tax minimization and to be able to have more investment options with your assets.
The downside is that you have more responsibility over your assets, as in, it’s up to you (or your financial advisor) to make sure your assets grow enough to support you through retirement. Also, if you take the lump sum, you often give up your health care and insurance benefits. A pension is a stable option that provides lifetime income with other benefits. It typically makes sense when you are risk-averse and would rather know what you will get as income for life.
However, the downside is that income is taxable for life. Plus, if you pass early on, the pension could be gone, depending on the payout option you choose. So what’s the solution? Look at your breakeven. How long do you need to live to make either option financially worth it to you? For teachers in Ohio, you can determine what you want from your pension, and then take the rest as a lump sum. This option can allow you to have the best of both worlds and keep your health insurance.
If you want help doing this, find a qualified financial advisor (like BA Schrock, hint hint) that can show you your options and guide you through these technical steps. By making a few adjustments just with your pension, you may be able to put more money in your pocket each month throughout retirement.
The 403b
Most all teachers have a 403b. This is an account that is attached to your employment until you reach 59 ½ years old, retire, or quit. Because these funds are intended to be saved until retirement, you can’t touch them until you are 59 ½ years old, or you’ll be subjected to a 10% penalty.
There is an exception for those who want to retire before 59 ½. If you end employment at 55 years old or older and leave your assets in your 403b (or 401k), then you should be able to take out those funds without the penalty. Be careful with this exception. If you end employment before 55 years old, you don’t qualify. If you have an old 403b or 401k, those funds do not count for the exception. Discuss this with your plan administrator (the person in charge of your 403b or 401k) before you take any action. If you can wait, then consider rolling your assets into a traditional IRA.
This option gives you more investment options and flexibility than your typical 403b. The question remains, “what do you do with your pile of money?” There are a few options to consider. If you are comfortable with the market, you can invest it and pull around 4% out as income each year. If you don’t have previous investment experience, this strategy should be reviewed by a financial professional in order to verify its suitability.
If you prefer to have more stability than risk, consider an annuity. They probably won’t give you the returns you can get in the stock market, but they can give you a similar predictability that you get from a pension. We have found that many teachers prefer to have a combination of investments. Don’t go all in on one or the other. Find balance in your plan. If you need help, work with a financial professional you trust.
Social Security
When considering filing for Social Security, base your decision on how long you believe you will live. If you don’t believe you’ll live past 75 years old, for example, then you probably want to take your Social Security benefit as soon as possible (62 years old).
If you have longevity in your family, consider taking your benefit at 70 years old. The goal is to get as much out of Social Security as possible. It can also help to start taking Social Security when you retire, lining up your Social Security benefit with your pension and any income from assets.
Unlocking Your Financial Future
When you create a baseline with your pension (or partial pension) and your Social Security, you can determine if you have your basic needs covered or if you’ll need more income. If you need more income, you can determine if you want to take that income from your investments in the market (higher earning potential with higher risk) or an annuity (lower earning potential and lower risk).
Once your income is figured out, the rest can be considered icing on the cake. When you can see your retirement with this level of clarity, you know you’ve unlocked your retirement. If you want more information about how to unlock your retirement and your retirement readiness, then we invite you to take our quiz made specifically for teachers.
Click the button below and take our 5 min quiz. No sensitive information is requested. By the end, your information will be sent to one of our advisors, who will run the analysis and send you back the results. The results are free. We hope it gives you clarity on how to unlock your financial future and enjoy your retirement.