Educators have an unusual mix of potential income sources in retirement. As a teacher, you're likely to be eligible for a defined-benefit pension plan. Depending on whether you teach for a public school or nonprofit private school, you’ll also typically have access to defined-contribution retirement plans that are specifically for educators, like 403(b) and 457(b) accounts. Your employers may or may not match your contributions.

However, you may not be able to depend on Social Security in your retirement years. About 40% of teachers do not pay into the Social Security system, according to research group Belwether Education Partners. If you're among that group, you'll be ineligible for Social Security benefits when you retire.

These many variables make retirement planning for teachers unique and sometimes complex. Here are some retirement moves educators should consider.

Key Takeaways

  • Careful retirement planning is especially vital if you're among the 4-in-10 teachers who will not receive Social Security benefits.
  • Your pension likely won't fully cover your needs in retirement, especially given pension reforms in some states.
  • A regular 403(b), the teachers' equivalent of a 401(k), can be helpful, especially if your employer provides a match to your contributions.
  • Educator-specific retirement accounts can differ in key respects from 401(k)s, and not all those differences are advantageous to you.

Seek Professional Help

Begin your search for educator-relevant retirement advice at the websites of the teachers association and Teachers Retirement System in your state. Through those, you should be able to reach retirement or benefits counselors familiar with your state's programs. The advice is usually free of charge.

“I would counsel teachers to start speaking to a retirement counselor from the state five years before your retirement date,” says Jeaninne Escallier Kato, a retired California public school teacher. “Many teachers wait until the last months of their tenure, then find out they didn't work to the best of their pay options.”

Kato paid into the California State Teachers Retirement System (CalSTRS) for 36 years and now collects 85% of her former pay, an extra $400 per month for three years’ worth of unused sick leave, and an extra stipend called “longevity pay.” She says talking to a retirement counselor helped her plan the formula that would work best for her.

Beyond the free help, you may want to hire a fee-only financial advisor to prepare a deeper and more comprehensive analysis of your finances. Ask the state counselors or other teachers in your area to recommend advisors who have specific expertise in helping teachers. Make sure to choose an advisor who is a fiduciary, meaning that they’re required to act in your best interests.

Reach out to resources in your state to learn how your teachers retirement system works and how to maximize your pension and other benefits.

Don't Expect Your Pension to Fully Provide for You

A significant majority of teachers in the country enjoy a defined-benefit pension, for which both the teacher and the employer make contributions. In exchange, the state promises a guaranteed payout for life upon retirement.

The payout varies based on the teacher's length of service, earnings history, and other specifics of the plan. But the amounts generally fall well short of most teachers' financial needs in retirement. As tabulated by in 2016, the average pensions for newly retired teachers in the past 10 years ranged from around $20,000 a year in states such as Florida, South Carolina, and Arizona through annual payouts in the $40,000s in California, Illinois, New Jersey, and New York. In only one jurisdiction, the District of Columbia, did the average pension crack the $50,000 mark—reaching $63,468, to be precise.

Modest as those numbers are, they may eventually head lower in some states, due to the underfunding of teachers' pension funds. The funding shortfalls are driving such reforms as reduced benefits for new hires, increased employee contributions, and lower cost-of-living adjustments for retirees.

Early in your teaching career, then, it's wise to begin supplementing your expected pension with participation in defined-contribution plans. These plans allow you to contribute with pre-tax dollars, and both contributions and earnings are sheltered from tax until they're withdrawn. “Teachers forget to add the [defined-contribution] savings that will supplement their teacher pension,” says Wyatt Moerdyk, managing member, Evidence Advisors Investment Management in San Antonio, Texas. "These accounts are crucial to the process."

Choose Your Tax-Sheltered Retirement Plan(s)

If you work full time for a public school or a tax-exempt private school, you should be eligible to contribute to at least one tax-sheltered plan sponsored by your employer. But since those plans have some drawbacks, you may also want to consider a self-directed individual retirement account (IRA).

The most common educator-specific plan is what's known as a 403(b). Closely resembling the 401(k) plans offered by private employers, a 403(b) lets you direct pretax dollars to investments you choose from among those offered by the plan. Investment earnings are also tax deferred; you pay tax only on plan withdrawals in retirement. If you’d prefer to pay taxes on the money now instead of when you retire, and if your employer offers the option, you can contribute to a Roth 403(b) instead.

Your employer may make matching contributions to your 403(b) plan, although that is less common than with 401(k) plans If those top-ups are offered, take them, since they essentially supercharge your account at no cost. For example, consider an employer that matches funds at 50 percent of the employee contribution up to 6 percent of his or her salary. If an employee earns $75,000 and contributes 6 percent per year, the employer kicks in an additional $2,250 per year, which is essentially free money toward the employee's retirement.

Occasionally, teachers are also offered the choice of a 401(k) by their employer. Consider that option closely, especially if it comes with matching funds.

A 401(k) can offer a wider range of investments than can a 403(b) plan, and plan fees are usually lower. 

If you work for a public school district, you may be able to participate in a 457(b) plan, in addition or instead of a 403(b) plan. As with 403(b)s, your 457(b) contributions come directly out of your salary and your investments grow tax deferred. (If you work for a private school that is classified as a tax-exempt organization, you may not have access to a 457(b) unless you are a highly compensated employee; those are the federal government’s rules.)

A downside of 457(b) plans is that employers usually don’t provide matching contributions—your employer is likely already providing a pension, after all. But there’s an upside: When you leave your job, you can start taking distributions from your 457(b) without penalty, even if you haven’t reached retirement age. If you’re considering early retirement or early partial retirement, a 457(b) can help you fund that goal.

With both 403(b) and 457(b) plans, employee contributions are limited to $19,000 per year in 2019. The combination of employee and employer contributions are limited to the lesser of $56,000 per year, as of 2019, or 100 percent of the employee's most recent yearly salary.

But there’s another perk here to 457(b)s: Participating in one of these plans doesn’t exclude you from contributing up to the maximum to a 403(b). If you maxed out your contributions to both a 457(b) and a 403(b) in 2019, you’d be putting away a whopping $38,000. If you’re older, you can save even more. And with a 457(b), when you’re three years away from the plan’s stated retirement age, instead of catch-up contributions, you can opt to start saving the lesser of either twice the annual limit or the sum of the current year’s limit and any unused portions of previous years’ contribution limits.

Whether you participate in a 403(b), 457(b), or both, make sure you understand the fees associated with both the plan itself and the investments offered within it before you contribute. Particularly if your employer plans offers no matching funds, you might consider contributing to a traditional IRA or Roth IRA. As with 401(k)s, you will enjoy a wider selection of investment options than the employer plans, and with fees that are likely to be lower.

Investigate Your Social Security Options

In 15 states, at least some educational employers do not participate in Social Security, and therefore their teachers neither contribute to the program nor enjoy its benefits. In 12 of those—Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, and Texas—few if any public school educators are covered. In three other states—Georgia, Kentucky, and Rhode Island—coverage is a patchwork, with some school districts participating and some not.

Even within so-called no-Social-Security-states, though, program participation can be a checkerboard. In California, for example, teachers who participate in CalSTRS do not pay into Social Security; they pay into the CalSTRS fund instead. But teachers who participate in the California Public Employees Retirement System (CALPERS) do pay into Social Security.

If you're unsure if you're contributing to Social Security, a quick glance at your payroll deductions will clarify the matter. You may also qualify for Social Security if you’ve worked in the private sector, but it typically takes at least 10 years of private-sector work to earn enough credits to qualify for benefits.

Your own participation aside, you might be eligible for spousal Social Security benefits if your husband or wife pays Social Security taxes. However, if you also have a pension, benefits received through your spouse might be reduced under government pension offset rules. “Many teachers rely on spousal Social Security benefits, only to find out later that they are dramatically reduced by the GPO rules,” warns financial advisor Moerdyk.

Weigh Working After You Retire From Teaching

Not everyone wants to, or can afford to, quit working after retiring from a full-time career in teaching. If you expect to teach part time, work in another profession part time, or start an encore career, think about how that income might influence how much you need to save and how much investment risk you need to take today.

That being said, not everyone is able to work when they’re older; some might have to take care of aging parents, and others will find that their own health prevents it. To be conservative, your financial plan should not rest on the assumption that you’ll continue to earn income from work after you retire from teaching full time.

If you do want to work, make sure you understand how continuing to work will affect your retirement benefits. Certain job choices will reduce your benefits, depending on your retirement plan’s rules.

Ensure You'll Have Sufficient Insurance Coverage

Provided it doesn't unduly reduce your retirement benefits, continuing to work after you retire can be a cost-effective way to continue health insurance and other coverage you may need. Those additional insurance needs may include securing long-term disability income insurance to protect your income and your ability to save for retirement. If you receive life or disability insurance as an employment benefit, make sure you have enough coverage, and if not, supplement it with a private policy.