Pensions Can Be a Complicated Topic, But They Don't Have to Be
I get it. Pensions can be a complicated topic. Teachers are one of the few professions left who still contribute to a pension. I have talked to many teachers who have no idea how their pension works, how much they contribute, and if there are other options to save for retirement.
I worked for a period of time in the school system. I know how hard teachers work, and I know how little time is spent “teaching” them to understand and save for retirement. Recently, I met with a client who had been a teacher for over twenty years in the state of Connecticut. I asked her how her pension worked, what the other retirement options were, and how was she saving for retirement? She didn’t know. She said a benefits sales representative came to the school once a year and “signed” you up. They didn’t explain the benefits or the options.
In the State of Connecticut, teachers and their employers must contribute to the plan. Those contribution rates are set by the state legislature and can change year-to-year. In 2018, teachers contributed 6 percent of their salary to the pension fund, while the state contributed 32.04 percent. In total, 38.04 percent of teacher salary was spent on Connecticut's teacher pension fund. However, not all of that investment goes toward benefits. While the full 6 percent of salary contributed by individual teachers is for benefits, the state contributes only 4.54 percent. The remaining 27.5 percent state contribution is to pay down the pension fund's debt.
These pensions are not portable, if you leave the state your years of service and payment into the pension plan do not follow you. You must work a minimum of ten years in the State of CT to be eligible, you cannot collect until retirement age. The amount you will receive is based on your best three years of service.
While having a pension is an important retirement tool, it is only one piece of the retirement puzzle.
What other options are available to teachers to plan for retirement?
Depends on the municipality
Can have 403b
Can be traditional or Roth
Can also have a 457 or 457b option – non-qualified deferred compensation for government and certain non-government employees – can be pre-tax or after-tax. Up to 100% of compensation not to exceed the annual applicable contribution limit. No 10% penalty prior to age 59 ½.
Would you like to know more? Schedule a time to discuss your options.