To all the public-school teachers out there, thank you. And congratulations. You have some of the best workplace benefits available. Summers off, the holidays off (banker holidays in between), and of course, the privilege of shaping and influencing generations to come. After all, it is all about the kids, right? I mean, the future of the world is sitting in your classrooms today! Yeah, even the kid licking the chalkboard.
So, while I’m sure that changing the world one classroom at a time gives you unlimited fulfillment, and you would never think about hanging it up, let’s not forget about those retirement benefits. You still have a pension available after all, which fewer and fewer folks can say every day. But how many teachers are truly confident that they are maximizing their benefits? How many know that they even have options?
My wife is a teacher, and like every other teacher out there, I’m sure she vividly remembers the day when she enrolled in her retirement benefits. Or not. That’s the whole point of this mildly sarcastic post. She, like most, can’t even remember signing up for benefits! Sure, we talk about healthcare options every year during open enrollment. We sit down with “benefits specialist” every year to review life and disability insurance options. But the truth is, other than glancing at their annual statement, most, and especially younger teachers probably don’t give a lot of thought to their retirement benefits.
Most teachers that I’ve talked to have had similar experiences when electing a retirement plan with STRS. It goes like this… “Sally at school told me to sign up for the pension option”. That’s it. In my time as a financial advisor, I have learned that not everyone’s situation is the same. Not everyone requires the same investment options, distribution options, liquidity options, etc. etc. etc. But there is a reason that 91% of you are enrolled in the Defined Benefit Plan (fancy words for pension). That’s what they are told to do. Or they don’t even know that they have other options. It is the default by the way.
https://www.strsoh.org/aboutus/impact/plans.html
Maybe your experience went more like this: Just like most employees who have a 401(k) at their job, you just went with the default option, because who has time to think about all that retirement stuff when you are preparing to embark on your new, exciting, and rewarding career?
STRS has offered a retirement plan since 1920 (before Social Security was established). For nearly 20 years, new teachers have been presented with some pretty compelling options. In 2001 STRS began offering in addition to the traditional Defined Benefit (DB Plan), a Defined Contribution (DC Plan) and a Combination (CO Plan). Let’s break that down a bit. Defined benefit essentially means you know what your benefit will be, i.e. pension. Defined contribution means you know what your contribution will be, and combination means, well you guessed it, a combination of the two. See the comparison chart below for more information.
https://www.strsoh.org/_pdfs/guides/20-609-chart.pdf
Teachers who were enrolled before 2001 have the DB plan for obvious reason. It was the only one available. Once you are committed to the DB, you cannot change plans. If you are in either the DC Plan or the CO Plan, you have a one-time shot in your 5th year to change to the DB option. Currently you are required to contribute 14% of your paycheck to your retirement plan, and remember your school is also chipping in. These rates are subject to change, and depending on the plan, the match varies from 9.53% up to 14%. For those of you out there keeping score, that’s huge. At least 23.53% of your salary is going to your retirement in some way, shape or form right out of the gates. Here in the private sector, that is unheard of.
Now, I think everyone likes the idea of a pension, but what if you don’t need a pension? Or what if you like the idea of a smaller pension with more flexibility and control over the money you are squirreling away for your golden years? How do you know what really makes sense for you and your family? A better question is how do you know what will be better for you and your family 35 years down the road? These sound like great questions for your financial advisor, don’t they? For crying out loud, you spend all day molding young minds. That’s what you are good at. Your advisor should be figuring this stuff out, right? I mean, that is what you are paying them for, isn’t it?
My point is, that when it comes to financial planning topics (and this is one of them), one size rarely fits all. But everyone (for the most part) is still doing the same thing! Now, there are various other ways that you can plan for retirement in addition to your STRS. In fact, you have some very good options. And no, contrary to popular belief, that does not always involve an annuity. 91% of you already have one anyway; it’s called your pension!
So, let’s say you’ve done the research and now you’re absolutely convinced that the DC or CO Plan are your best options. But you’ve already enrolled in the DB Plan. What do you do? As referenced earlier, unfortunately, you cannot make a change. However, it’s not necessarily game over. You have a guaranteed pension, and as a result you probably have more risk capacity outside of your current plan. Enter the old standby IRA (or Roth IRA depending on your current tax situation) which I typically suggest before entering the wonderful world of Deferred Compensation (a topic for another post). If at this point you are still looking for additional retirement savings avenues beyond these, you are kicking serious retirement butt! Again, there is no one size fits all, so I encourage all of you to seek out a competent financial planner, preferably a fiduciary (someone legally obligated to act in your best interest). Get to know your benefits and pay it forward. I highly encourage you to pass this knowledge along to new teachers entering the workforce. Many of you have children or nieces and nephews who are following in your footsteps. Wouldn’t you have liked to know this stuff when you were starting out?